April 26, 2019/Cordros Report

Event: OKOMUOIL recently published Q1-19 results, showing significant contractions across key lines – revenue (-42.5% y/y), PBT (-68% y/y), and PAT (-71% y/y). Similarly, relative to the previous quarter, PAT declined by 20%, driven by a blend of higher finance charges, together with a three-fold jump in operating expenses. The reported PAT missed our estimate by 71%, largely on account negative topline and input cost surprises.

Over Q1-19, OKOMUOIL’s revenue was dragged by the duo impact of lower CPO sales (-45% y/y) and rubber sales (-26.7% y/y). Unlike the corresponding quarter of last year, wherein healthy volume growth helped limit price erosion passthrough to topline, OKOMUOIL suffered the double whammy of lower prices and depressed volume. For evidence, global CPO and rubber prices moderated by 19.3% y/y and 4.8% y/y, respectively. Since the company’s prices track global prices, we believe selling price most decline in the period.

Set against the foregoing, revenue dipped by 42.5% y/y – the fourth consecutive y/y revenue decline. It’s instructive to highlight that the impact of the high base from last year must have aggravated the topline decline, as revenue of NGN7.34 billion recorded in Q1-18 was the highest in the history of the company. From a quarter ago, revenue was higher by 18%, driven by higher CPO prices (+8.0% q/q).

Meanwhile, despite the moderation in volume growth, Q1-19 COGS expanded by 27.9%, setting the stage for gross margin contraction of 10.9 pps to 80.1%. Management had earlier guided to sustained input cost pressure over 2019, emanating from energy challenges, as more than 60% of its energy needs are sourced from expensive power generating sets. On balance, gross profit declined by 49.4% y/y. On a quarter on quarter basis, the impact of price induced revenue jump, together with lower input cost (-72.6% q/q), drove a five-fold expansion in gross profit.

Elsewhere, OPEX (-23% y/y) declined slower than revenue, resulting in a 12.3 pps increase in OPEX-to-sales ratio. Thus, EBIT declined by 67% y/y, with related margin shedding 23.3 pps to 31.4%. Quarter-on-quarter operating profit declined by 12%, following a 352% q/q increase in OPEX.

Further down, net finance charges expanded by 47% y/y, driven by lower finance income (-76% y/y) which declined faster than finance expense (41% y/y). The moderation in finance income mirrored the (1) 45% decline in cash balance, (2) softer yield environments, and (3) lower foreign exchange gains, as the naira was stable. Meanwhile, the decline in finance charges was not surprising since the company is yet to commence interest payments on the newly acquired NGN1.95 billion agriculture credit loan from the Bank of Industry (BOI).

Overall, reflecting the combination of lower topline growth and subsisting COGS pressure, both of which masked gains from lower taxes (-47.5% y/y), OKOMUOIL reported 71.0% y/y and 20.1% q/q declines in EPS to NGN1.05 in Q1-19.

Comment: OKOMUOIL’s performance was weak in our view, given the depressed domestic CPO and rubber prices. Also, the company still faces COGs pressure, following the subsisting energy tailback. OKOMU trades at a P/E of 11.38x — a significant discount to its Middle East and Africa peers’ 14.71x. Our last communicated TP was NGN93.62, which implies a potential upside of 30.2%. Our estimates are under review.