October 23, 2018/InvestmentOne Report 

·         Declining Top line :  down 33.07% q/q, 8.89% y/y.

·         Improved gross profit margin:  up  696bps q/q;  1552bps y/y.

·         Volatile opex/sales ratio:  up  1214bps q/q; down 44bps y/y.

·         Mixed  PBT performance : down 40.08% q/q; 30.42% y/y. 

Last Friday, Okomu Oil Palm Plc published its Q3 2018 results, which were reflective of better cost management despite the fall in global prices of Crude palm oil and rubber. On a y/y basis, turnover declined by 8.89% to N3.75billion in Q3 2018 due to the 13% y/y and 37% y/y fall in prices of Crude Palm Oil and Rubber respectively during Q3 2018. 

Cost Efficiency Supports Gross Profit Margin

The company’s results showed a 30.42% y/y improvement in PBT to N1.78billion in Q3 2018 driven by the rise in gross profit margin to 86.54% from 71.20% in Q3 2017. This may be the result of better cost management by the firm, which could have outweighed the effect of the fall in prices of Crude Palm Oil and Rubber in the international commodities market. We highlight the company benchmarks its prices in the local market against prices at the international market. 

Higher Gross Profit Margin Offset the Impact of Net Finance Cost

Moving down to the P & L line, the 44bps y/y decline in OPEX/sales to 39.04% and a stronger gross profit margin offset the impact of the net finance cost of N3.29million (vs a net finance income of N64.84million in Q3 2017). We highlight that the net finance cost in Q3 2018 was as a result of lower interest on deposits of N74million in Q3 2018 relative to interest of N130.86million in Q3 2017. We believe the repayment of the company’s foreign exchange loan in Q1 2018 could have reduced the company’s cash position compared to 2017.  

We highlight that the company repaid about N78.77million of its foreign loan in Q1 2018. Overall, the company recorded a PBT margin of 47.42% (against 33.13% in Q3 2017) and 30.42 %y/y improvement in PBT to N1.78billion in Q3 2018.

Lower Pricing and Volume Drove Earnings Down Quarter on Quarter

On a sequential basis, turnover fell by 33.07% q/q due to lower prices in the third quarter of the year with average prices of both crude palm oil and rubber declining by 10%q/q and 11%q/q respectively in Q3 2018. In the same vein, we highlight that volumes are usually low in third quarter with the output always reaching the peak in second quarter of the year. This could have contributed to the fall in revenue in Q3 2018. 

However, gross profit margin rose to 86.54% in Q3 2018 from 79.58% in Q2 2018, which may be due to favourable cost management. That said, the jump in opex/sales to 39.04% in Q3 2018 from 26.90% in Q2 2018 and the net finance cost of N3.29million in Q3 2018 against a net finance income of N15.70million in Q2 2018 offset the impact of the improvement in gross profit margin. As a result, the company’s PBT margin declined by 555bps q/q to 47.42% driving a 40.08%q/q fall in PBT to N1.78billion in Q3 2018. 

Fantastic H1 2018 Supports 9M 2018 Performance

In 9M 2018, turnover was somewhat flat as it fell by 0.59% y/y despite the fall in prices of Crude Palm Oil and Rubber. We believe higher sales volume could have offset the impact of the fall in prices as management highlighted that the peak period, usually in the first half of the year, was stronger in 2018 than 2017. Elsewhere, gross profit margin improved by 114bps to 86.20% in 9M 2018 which may be due to better cost management so far in 2018.  

That said, the 54.97%y/y decline in net finance cost and better gross profit margin reduce the impact of the jump in OPEX/sales ratio to 32.79% in 9M 2018 from 29.43% in 9M 2017. The jump in OPEX/sales is in line with the management’s plan to increase wages and salaries by 15% y/y for the next three years.  

On the other hand, the fall in net finance cost may be connected to a lower foreign exchange loss of N178 million in 9M 2018 compared to N256million in 9M 2017. Overall, the company’s PBT margin declined by 303bps y/y to 53.27% and it recorded a 4.92%y/y fall in PBT to N8.72billion in 9M 2018. 

Summary And Outlook

Overall, the results were headlined by lower pricing, which weighed on revenue despite improved sales volume. Nonetheless, cost efficiency boosted gross profit margin.  

Going forward, we expect the company to continue to leverage on the supply deficit in the local market, which has been supported by the government’s exclusion of importers of crude palm oil from the official foreign exchange market.  

Similarly, we expect the company’s rubber expansion plan to help to diversify its revenue base and generate foreign exchange income which may be used to hedge against the company’s FX exposure. Elsewhere, we believe the newly commissioned plant, Extension 2 Estate in Q2 2018, may increase the company’s production capacity and support its top line performance in the long run. 

In the same vein, the expected improvement in consumer spending in Q4 2018, could improve demand for crude palm oil especially for the production of other consumer goods. However, we highlight that the feedback from consumer names on potential increase in volume in H2 2018 has been mixed. 

However, the company’s plan to increase the salary of staff by 15% for the next three years may increase the opex/sales which could negatively affect the PBT margin going forward given that wages and salaries are about 40% of the operating expenses. 

Similarly, stability in the parallel FX market may encourage importation of crude palm oil thus reducing the current supply deficit gap in the long run. This may be negative for both volume and prices thus affecting revenue growth in the near term. 

In the same vein, the company’s plans to borrow for expansion could increase its finance cost, which may lead to lower PBT margin going forward. However, the impact of this borrowing on finance cost may be limited as it would be borrowed from the Bank of Industry at a single digit rate. 

Source: Company financials, Investment One Research