October 29, 2019/InvestmentOne Report

Higher Top line :  up 60.60% q/q, 86.28% y/y

·         Improving gross profit margin:  up  1214bps q/q; 595bps y/y

·         Rising Opex/sales ratio: up 530bps q/q; 1016bps y/y

·         Stronger PBT performance : up 108.99% 10.12q/q; 83.78% y/y 

Recently, Okomu Oil Palm Plc published its Q3 2019 results, which were reflective of strong sales volume despite weak price levels in the global Crude Palm Oil (CPO) market. We highlight that average CPO price was 7.55% year on year lower compared to Q3 2018 as the impact of trade tension continued to weigh on CPO demand. However, we believe the recent border closure, as highlighted by the company’s Managing Director, could have supported volume sales. As such, turnover rose by 86.28%y/y to N6.98billion in Q3 2019 with the revenue from CPO and Rubber rising by 89.11%y/y and 71.41%y/y respectively. 

Margin Improves Despite Weaker Prices

The company’s results showed a 595bpsy/y increase in gross profit margin to 92.50% in Q3 2019 on the back of better cost management by the company. We believe the newly erected wood boiler, which was expected to lower rubber processing costs by about 15% in 2019 according to the management, could have supported the improvement in margin.   

One-off Cost Weighs on Earnings.

Moving down to the P& L line, the jump in OPEX/Sales to 49.19% (vs 39.04% in Q3 2018) reduced the impact of the increase in gross margin and the net finance income of N242.58million (vs net finance cost of N3.29 million in Q3 2018). We believe the company’s implementation of its planned salary increase by 15% over three years (2018-2020) as well as a one-off expenses on fertilizers recorded in Q3 2019 could have caused the rise in OPEX. The increase in net finance income may be due to improved cash position of the company as interest rates in Q3 2019 were lower than Q3 2018 levels.

Overall, the company’s PBT margin was somewhat flat falling by 64bpsy/y to 46.78% while PBT rose by 83.78%y/y to N3.26billion in Q3 2019. 

Border Closure Outweighs the Impact of Off-peak periods

On a sequential basis, turnover increased by 64.69% q/q due to the impact of the recent border which started in the quarter. Similarly, gross profit margin jumped to 92.50% from 80.36% in Q2 2019 due to relative improvement in CPO prices (+1.75%q/q on average) in Q3 2019.

That said, the improvement in margin and finance position (net finance income of N242million in Q3 2019 vs net finance cost of 22million in Q2 2019) offset the impact of the 530bpsq/q jump in OPEX/sales. As such, PBT margin rose to 46.78% in Q3 2019 from 35.95% in Q2 2019 and PBT rose to N3.26billion from N1.56billion in Q2 2019.  

9M Performance Remains Weak

In 9M 2019, Okomu’s turnover was down 6.84% y/y to N15.54billion due to lower CPO prices in 2019 despite the significant volume improvement in Q3 2019. However, gross profit margin remained somewhat flat, only down by 46bpsy/y to 85.75% as the company’s cost management strategy could have limited the impact of the weaker prices in 2019.  

That said, the jump in Opex/sales to 47.58% in 9M 2019 from 33.79% in 9M 2018 offset the effect of the net finance income of N166.26million in 9M 2019 from a net finance sot of N24.58million in 9M 2018. As a result, PBT margin fell to 39.24% in 9M 2019 from 52.27% in 9M 2018 and PBT declined by 30.06% y/y to N6.10billion in 9M 2019.  

Summary And Outlook 

Overall, the results were headlined by stronger volume which outweighed the impact of lower pricing and a spike in operating expenses.  

Going forward, we expect the company to continue to leverage on the supply deficit in the local market, which has been supported by the government’s exclusion of importers of CPO from the official foreign exchange market. This may be supported by recent border closure by the Federal Government which should be positive for volume in the near term. Nonetheless, we do not expect the border closure to remain for a long term. 

In the same vein, we expect the company’s rubber expansion plan to help to diversify its revenue base and generate foreign exchange income which may be used to hedge against the company’s FX exposure. Similarly, we believe the newly commissioned plant, Extension 2 Estate, may increase the company’s production capacity and support its top line performance in the long run. We highlight that the company has completely planted all arable areas and no further land for palm is available again. 

Similarly, we opine that the newly erected 5mega watts turbine at the oil mill may improve margin in the near term as it is expected to generate enough power for both Okomu and Extension 1 thus reducing higher energy cost from third party. In the same vein, the expected improvement in consumer spending in Q4 2019 on the back of implementation of the new minimum wage could improve demand for CPO particular for the production of other consumer goods.  

On the international prices, we believe the recent slowdown in global production growth, rise in demand for biodiesel sector, particularly from Indonesia, and rising palm oil requirement of India and China could support prices in the near term. However, the downside risk to price remains an escalation in trade tension between US and China. 

The company has declared an interim dividend of N2 per share (implied dividend yield of 3.64% based on yesterday’s close price) and the qualification date is 30^th October, 2019.

  Sources: Company financials, Investment One Research