Culled—Proshare

August 10, 2020

by FBNQuest Research

Softer outlook for 2021E on the back of covid-related delays

Okomu Oil (Okomu) published strong Q2 2020 results. Earnings were up 30% y/y to N2.0bn and were in line with our expectations. The pandemic-related lockdown had a marginal negative near-term impact on both operations and domestic demand for palm oil. Profits were helped by a combination of higher unit volume sales (up +72% y/y) for its core product (palm oil) and pricing. In Q2, palm oil sales accounted for c.93% of total sales, up from 91% in the prior quarter.

The closure of national borders announced last year to prevent smuggling continues to provide topline support for palm oil sales. However, rubber exports remain subdued due to constraints at the ports and soft global demand. Nonetheless, we have tempered our outlook for 2021E solely on the back of the ongoing pandemic. While we expect domestic palm oil demand to remain strong, we believe movement and cross-border travel restrictions present challenges. Management now expects that the commissioning of the production plant at the Extension II plantation will be around end-H1 2021. This will result in a cumulative delay of close to 9-12 months for the project.

Also, in our view, potential cost savings benefits from the installation of a 5MW turbine at the rubber factory will now be deferred beyond Q1 2021 due to covid-related interruptions. Given this situation, we have cut our 2021E sales and EPS forecasts by 9% respectively. Overall, our earnings outlook over the 2020-21E period is down by 5%, as we made negligible changes to our 2020E estimates. Our new price target of N74.4 is up by 18% because we have rolled forward our valuation to 2021. Our new PT implies a potential downside of -3.4% from current levels. As such, we retain our Neutral rating on the stock. 

Okomu shares are trading on a 2020E P/E multiple of 11.1x for EPS growth of c.33% over the next two years. 

Q2 2020 earnings boosted by strong sales and GM expansion 

In Q2, earnings were up by 30% y/y to N2.0bn. Earnings growth was boosted by a topline improvement of 51% y/y to N6.5bn and a gross margin expansion of +649bps y/y to 87.3% during the quarter. Similar to Q1, strong palm oil sales growth (up 68% y/y to N6.1bn) more than offset relatively weaker rubber sales (which declined -35% y/y). Palm oil sales were primarily supported by higher unit volume sales which grew by c.72% y/y to c.13,400tonnes. PBT of N2.5bn advanced 59% y/y.

Sequentially, while sales fell -6% q/q, PBT declined by -18% q/q. PAT came in flattish on a q/q basis. Compared with our forecasts, sales beat by around 8% while earnings were in line with our estimate.