April 29, 2020/InvestmentOne Report
Our key takeaway from Okomu audited 2019FY earnings is the sequential deterioration in gross margin. In fact, Okomu reported a negative gross margin of -10.4% in Q4-19; the first loss at the gross level in the history of the company. For clarity, COGS grew by 20.1% y/y, while revenue dipped by 7.0%, to set the stage for a gross loss of NGN346.58 million. In our previous notes – Less Than Effervescent Outlook – we had initially guided to sustained cost pressure for the company since management typically pushes costs associated with cultivating activities into the second half of its financial year. Thus, we believe the full impact eventually played out in Q4. Meanwhile, Q4-19 revenue came in lower as benign rubber sales (-41.0% y/y), was enough to mask the slight growth in CPO sales (+4.1% y/y). For the latter, we understand the blend of (1) higher global CPO prices (+22.9% y/y) and (2) the sustained closure of the land border by the FGN, which significantly reduced the influence of smugglers of cheaper CPO products, provided compelling arguments for management to raise domestic CPO prices. As with CPO prices, global rubber prices also grew by 7.9% y/y, and since Okomu exports all its rubber, we’re tempted to believe that a sharp decline in volume sold must have weighed on rubber sale.
Adjustment to OPEX Provided Supports EBIT in Q4: While we are yet to engage management, we believe that the NGN7.39 billion booked as OPEX in its unaudited 9M-19 financial was an error. In its 2019FY earnings, we like that the company reversed its previously overbooked OPEX to NGN5.43 billion (+12.7% y/y). The impact of this provided the needed breather for Q4-19 operating profit (NGN1.42 billion). Meanwhile, we have normalized 9M-19 OPEX to 4.07 billion, to reflect 5-years historical OPEX average. Overall, the company reported Q4-19 EPS of NGN0.98/s (-25.5% y/y), taking 2019FY EPS to NGN5.29/s (-40.6% y/y). On the 2019FY EPS, the board proposed a final dividend of NGN4.00/s (2018FY: NGN3.00/s), which translates to a yield of 7.2% on its last closing price (NGN55.05/s).
2020 is Still A Volume Year, But Price Erosion Is the Spanner in The Works: YTD global CPO prices have fallen 24.8%, largely driven by slower global CPO demand, which was in turn, driven by the outbreak of COVID-19. For us, if domestic prices were to mirror this move, the average selling price for Okomu will decline by 18.8% over 2020E. Assuming our CPO volume growth estimate remains intact (+51.6% y/y), a 19% price erosion will lead to a 2020E revenue of NGN20.8 billion (+10.2% y/y). We forecast EBITDA of NGN12.2 billion, relative to EBITDA of NGN9.0 billion in 2019. We, therefore, expect a lower PBT of NGN10.30 billion for the company (previously estimate: NGN12.31 billion).
Valuation: We now expect an EPS of NGN8.6/s (NGN10.3/s previously), largely driven by price-led slower revenue growth. Our revised TP of NGN63.16/s (previously: NGN76.20) implies an upside potential of 14.7% on the closing price of NGN55.05 (28th of April 2020). Thus, we downgrade our rating on the stock to a HOLD. On our estimates, the stock is trading at 2020E and 2021E forward P/Es of 6.4x and 5.2x, respectively.
Click here to read full PDF copy of report
