Extending its declining trend since Q2-18, revenue dipped further by 2.8% y/y in Q4-18 on account of subsisting lower global CPO prices (-11.3% y/y) with pass-through to domestic prices, and depressed rubber prices (-4.5% y/y). A similar pattern played out over 2018FY as the company grappled with lower global commodity prices (CPO: -13.6% y/y; Rubber: -23.0% y/y).

However, we highlight that volume improved in the period, driven by higher oil extraction rate, thus, offsetting the price decline to leave revenue growth largely flat. Management linked the improved production to higher palm oil production (+8% y/y), which was supported by elevated oil extraction rate. Furthermore, as all rubber produced is exported, the impact of depressed rubber prices also weighed on rubber sales.

Whilst we like that volume improved in the period, CoGs grew at a faster pace of 74.9% y/y in Q4-18, largely reflecting the lingering energy challenges. Thus, gross profit hit its lowest level since Q4-15, declining sharply by 73% y/y, with related margin moderating by 72 percentage points to 14.4%. Set against the rapid expansion in CoGs, OKOMUOIL’s cost to sales ratio hit a historical high of 85.6% (Q4-17: 47.6%). Over 2018FY, Okomu reported 26% y/y expansion in CoGs, resulting in 7% y/y moderation in gross profit (Gross margin: -600 bps to 74%).

On the positive, the company sustained its tight grip on OPEX (-4.7% y/y. Nonetheless, operating profit declined by 7.8% y/y, with EBIT margin shedding 4.3 pps to 50.6%. Over Q4, the company reported 13.9% y/y and 5.1 pps decline in EBIT and EBIT margin.

Save for the NGN1.9 billion loan received from the Bank of Industry (BOI) early last year, with one-year moratorium, OKOMUOIL has largely operated debt free since it paid down the outstanding parent company loan (EUR10 million). Thus, net finance charge printed a tamer NGN61.1 million in 2018FY (2017FY: NGN7 million).

Largely reflecting the combination of lower topline growth and subsisting CoGs pressure, both of which neutered gains from benign OPEX and interest charges, OKOMUOIL reported 3.2% y/y decline in EPS to NGN1.32 in Q4-18, taking 2018FY EPS to NGN8.91 (2017FY: NGN9.59).

Comment: OKOMUOIL’s performance was weak in our view, given the depressed domestic CPO price. Also, the company still faces CoGs pressure, following the subsisting energy tailback. OKOMU trades at a P/E of 8.98x — a significant discount to its Middle East and Africa Peers. Our last communicated TP was NGN91.57, which implies a potential upside of 14.0%. Our estimates are under review.