Culled—Proshare
May 7, 2020
by FBNQuest Research
Mild changes to earnings outlook over the 2020-21E period
We have made slight downward adjustments to our EPS forecast over the 2020-21 period. Although Okomu Oil (Okomu) has started the year strongly, with earnings of N2.0bn, up +101% y/y, we forecast a milder full year 2020E bottom-line growth of around 24% y/y. We expect a subdued H2 broadly in line with management guidance. Q1 results were boosted by impressive palm oil sales, which grew 82% y/y to N6.4bn. Fortunately, the health-related lockdown in March/April had no material impact on this business segment. We anticipate another strong performance for the palm oil business in Q2.
Conversely, the rubber segment faced combined headwinds from lower global demand and port-related bottlenecks, which weighed on sales. We expect continued pressure on this business segment through the year. From a cost perspective, the installation of a 5MW turbine at the rubber factory would provide some relief. We expect benefits to fully come through from next year as installation has been delayed due to extraneous reasons.
Management guides to a 30-50% savings in the firm’s total electricity bill and a significant decline in maintenance costs on the current power plant. We forecast strong sales growth of 51% y/y to c.N29bn for 2021E on the back of relatively higher palm oil production as the firm’s Extension II plantation nears maturity.
Additionally, yield from an additional 250 hectares from outgrower fields will be supportive. Our new price target of N63.0 is down by -10% because of a 150bps increase to our equity risk premium assumption to 7.5%. Our new PT implies a potential upside of +15% at current levels. As such, we retain our Neutral rating on the stock. Okomu shares are trading on a 2020E P/E multiple of 7.9x for EPS growth of c.34% over the next two years.
Q1 2020 earnings boosted by strong palm oil sales
Q4 2019 earnings grew by 26% y/y to N1.3bn, primarily because of other comprehensive income of N319m (vs. a loss of -N262m in Q4 2018) during the quarter. However, the underlying performance was more subdued as a result of weaker sales (down -7% y/y to N3.3bn) and rising production costs. Okomu proposed a final dividend of N2.00 which works out to a yield of 3.6%.
However, Okomu has started the year strongly with earnings of N2.0bn up by +101% y/y. Earnings growth was buoyed by a double-digit (+66% y/y) improvement in sales. Gross margin also expanded by +1625bps y/y to 96%. Palm oil sales were up 82% y/y to N6.4bn during the quarter to more than offset a -13% y/y contraction in rubber sales of N631m. Similar to Q4, rubber sales continued to shrink on a y/y basis.
