24/10/2018/Cordros Report
Update: Over 9M-18, OKOMU reported a 13.3% y/y growth in earnings, buoyed by sharp decline in COGS amidst relatively flat revenue and lower effective tax rate. We have revised our revenue estimate for 2018E slight lower to NGN20.86 billion (from NGN21.1 billion) to reflect weaker performance in Q3. To add, we cut our FY-18 projection for input cost to NGN3.19 billion (from NGN3.58 billion) which should neuter weaker topline amidst continued gains from lower finance charges. Bringing it all together, we now expect earnings to climb 4.5% to NGN9.6 billion.
Weaker commodity prices underpin lower topline: For the rest of the year, we expect revenue to be slightly weakened by sustained moderation in commodity prices. Pertinently, lower global rubber prices led to lower rubber sale in Q3-18, and given OKOMU exports all its rubber production, pressured global rubber prices (-30.1% YTD to USD1.28/kg) will continue to drive benign rubber sale. Thus, whilst we maintain our FY-18 projection for CPO sales at NGN17.95 billion, we revise revenue projection for rubber to NGN2.91 billion (previously: NGN3.14 billion), reflecting the (1) weak volume and price performance in Q3-18and (2) persisting supply glut, amidst weaker demand from China and brewing global trade concerns.
Elsewhere, we expect management’s tight lid on input cost will continue to buoy gross margin which should largely offset rising operating expenses. Therefore, to reflect lower-than-expected COGS, together with faster rise in operating cost in Q3-18, we revise our input cost lower by 11% to NGN3.19 billion (prior forecast: NGN3.58 billion) and operating cost higher by 6.7% NGN6.57 billion (prior forecast: NGN6.16 billion). We highlight that higher operating cost continues to reflect the start-up operations at Extension II. The combined impact of the foregoing will lead to 2% y/y increase in EBIT to NGN11.3 billion.
Valuation: Largely reflecting strong earnings growth in Q1, Okomu stock has rallied 17.9% YTD, outperforming the broader market’s 13.8% loss. The stock trades at current P/E of 7.6x relative to 49.7x for Bloomberg peer average which is at a stack discount. On current market price of NGN79.80, our revised TP implies an upside of 14.75%, and expected total return of 19% after incorporating our 2018E dividend yield of 4.4%. We maintain our HOLD recommendation on the stock.
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