May 5, 2020/Cordros Report
Yesterday, OKOMUOIL released its Q1-20 result, which showed that the company recorded a 65.5% y/y increase in revenue, primarily driven by CPO volume expansion, while EPS grew by 101.4% y/y. When annualized, the reported EPS for the period is only 2.0% below our FY2020 estimate and 20% below Bloomberg consensus estimates.
CPO Production Enters a New Growth Phase… – In our last sector update (See report: Surging Volumes to Lift Earnings; All Eyes on the Border) we had stated that OKOMU’S CPO production is entering a new growth phase, with a total of c.9,000 hectares of mature plantation coming on stream between 2020 and 2021 from its Extension II. True to our prognosis, OKOMUOIL delivered a 65.5% y/y topline growth in Q1-20, supported by higher CPO sales (+81.6% y/y), which was more than enough to offset lower rubber revenue (-12.5% y/y). On the former, we highlight the blend of higher volume growth and stronger selling prices as notable drivers of the sturdy outturn. On CPO prices, we believe the closure of all land borders by the FGN, which materially reduced the influence of smugglers of cheaper CPO, ensured that higher global CPO prices, cascaded favourably into domestic prices (+4.4% y/y) in the period. This is so because OKOMU is a price taker. Meanwhile, management disclosed that volume grew by 90.7% y/y, mostly on higher mature acreages from extension OKOMU II.
…As Rubber Production Peaks – Elsewhere, the decline in rubber sales was driven by a combination of lower rubber prices and volumes. On volume, we understand that OKOMU’s rubber production has hit its peak in 2019 as the company plants an additional c.1,500 hectares, to fully exhaust total land area under rubber plantation. Thus, rubber production is expected to remain largely tame in the near term. Meanwhile, since OKOMU exports all rubber produced, we believe the lower average price realized, largely reflects the benign movement in global rubber prices (-4.6% y/y).
Sequential Margin Improvement Underpinned by Lower COGS: We like the sequential improvement in gross margin in Q1-20 (96.4% vs. -10.4% in Q4-19), which is mostly driven by a seven-fold q/q reduction in COGS. This is unsurprising as we understand that OKOMUOIL typically pushes costs associated with cultivation activities to the second half of the year. From a year ago, gross margin improved by 16pps y/y, following a sharp decline in COGS (-69.9% y/y). Despite a 71.0% y/y expansion in OPEX, OKOMUOIL delivered a 15.0ppts y/y increase in EBIT margin. Overall, EPS grew by 101.4% y/y, masking the surge in interest expense (+153.7% y/y) and higher effective taxes (+12.0ppts y/y).
Falling CPO Prices to Place a Ceiling on 2020E Earnings – We reiterate that lower CPO prices pose the biggest threat to OKOMUOIL earnings through the rest of the year. YTD global CPO prices have fallen 26.2%, largely driven by benign global CPO demand, occasioned by the outbreak of COVID-19. Going forward, lower global CPO prices is now expected to reflect in OKOMU’s selling prices. Thus, while we left all other lines unchanged, the average selling price for the company is expected to decline by 18.8% y/y over 2020E. On volume, management said it does not anticipate the impact of economic disruptions from COVID-19 to impact its sales volume as evident from its near doubling of volume growth in Q1 alone. The company produced 15,510MT in Q1-20 vs. 8,134MT in Q1-29. When annualized, the reported volume produced is only 3.4 below our 2020FY estimates. On balance, revenue is now expected to print NGN20.8 billion (+10.2% y/y) over 2020E.
Valuation: We maintain our TP of NGN63.16/s, which implies an upside potential of 14.7% on the closing price of NGN55.05 (4th of May 2020). Thus, we retain a HOLD rating on the stock. On our estimates, OKOMU is trading at 2020E and 2021E forward P/Es of 6.4x and 5.2x, respectively.