In line with the pattern over the past 5 quarters, OKOMUOIL reported a significant decline in sales growth (-22.4% y/y) – 33% below our estimate. This was reflective of the combination of lower CPO prices and decline in volume. For context, global CPO price declined by 19.6% y/y, the impact of which cascaded into a lower domestic price. The sharp decline in CPO sales trumped higher rubber sales, with the latter aided by favourable pricing (rubber: +8.2% y/y) environment and stronger volume sold. From a quarter ago, revenue grew by 3.0% driven by higher volume growth which offset lower prices (-5.2% q/q).

Meanwhile, Q2-19 COGS decelerated by 25.3%, setting the stage for an 8 bps expansion in gross margin to 80.4%. To our mind, the deceleration in COGS was on account of lower cultivation activities which OKOMUOIL pushes to the latter quarters of the year. On balance, gross profit declined by 21.6% y/y. On a quarter on quarter basis, the impact of volume induced revenue jump, which rose faster than input cost (+1.8% q/q), drove a 3.2% q/q growth in gross profit.

Elsewhere, amid a decline in sales growth, OPEX expanded 26.7% y/y, resulting in a 17.0 pps increase in OPEX-to-sales ratio. Thus, EBIT declined by 46.3% y/y, with related margin shedding 16.2 pps to 36.5%. Quarter-on-quarter operating profit expanded by 19.4%, following a 7.2% q/q decline in OPEX.

Further down, net finance charges moderated by 244.7% y/y, driven by lower finance income (-98% y/y) which declined faster than finance expense (-80% y/y). The moderation in finance income mirrored the (1) 58% decline in cash balance, (2) softer yield environment, and (3) lower foreign exchange gains, as the naira was stable in the period. Meanwhile, OKOMUOILs total long-term loan position rose by +53% y/y reflecting an additional NGN10 billion agricultural credit loan (CBN’s Differentiated Credit Reserve Ratio of 8% charges) approved by the CBN. As at H1 19, the company has drawn down NGN1.72 billion. However, as with the NGN1.95 billion received from the BOI last year, negotiation on moratorium is still ongoing before interest charges begin, hence, the decline in interest expense.

Comment: OKOMUOIL’s performance was weak in our view, given the depressed domestic CPO prices and volume growth. On our estimates, OKOMUOIL trades at a P/E of 10.07x — a significant discount to its Middle East and Africa peers’ 13.18x. Our last communicated TP was NGN92.57, which implies a potential upside of 78.0%. Our estimates are under review.