July 31, 2019/Cordros Report

Q2-19 Update: OKOMUOIL’s earnings result showed that the company’s EPS declined by 38.4% in Q2-19, similar to Q1-19 when EPS was 71.0% lower than the corresponding period of the prior year. The decline in EPS was on account of a material decline in CPO prices, and to a lesser degree, a decline in volume. However, the company recorded a slight improvement in gross margin (+80 bps y/y), with COGS (-25.3% y/y) decelerating faster than revenue (-22.4% y/y). Even as finance charges (-80.0% y/y) touched the lowest level in 18 quarters, sizeable expansion in OPEX worsened the case for the company. Against that backdrop, PBT declined by 47.3% y/y, with the related margin down 17.0 percentage points to 36.0%.

What a Difference a Free Fall in Price Makes: To capture the disappointing price movements, we have revised our revenue estimate downward by 20.5%. While we had underscored our view of benign volume growth expectation over 2019E in our sector report (see the report – Foundation Laid for a Leap of Faith), domestic CPO prices underperformed our forecast, due to the unrelenting global CPO supply glut. Beyond the foregoing, the blend of (1) still porous Nigerian borders and (2) sustained FX liquidity, have resulted in the continued influx of CPO into the Nigerian market, thereby exerting downward pressure on domestic prices. Amid the absence of a significant global CPO demand catalyst, we do not see CPO prices recovering for the rest of 2019. This is despite the implementation of biodiesel mandates in Malaysia and Indonesia, together with potential El Nino development over H2-19, both of which should have ordinarily supported prices.

Valuation: From our previous estimate of NGN12.6/share, we now forecast OKOMUOIL’s EPS to decline by 18.4% y/y to NGN7.3/share, on account of (1) material decline in revenue and (2) higher finance charges. Our revised TP of NGN87.02/share (previously: NGN91.99) implies an upside potential of 40.2% on the closing price of NGN52.00 (30th of July 2019). We retain our BUY rating on the stock. On our estimates, the stock is trading at 2019E and 2020E forward P/Es of 10.4x and 7.4x, relative to 11.4x and 4.4x for Bloomberg Middle East & Africa peers.

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