CPO volume growth drives accelerated Revenue growth
In its recently released Q1 2020 financials, Okomu oil reported a 65.5% y/y increase Revenue to N7.0bn in Q1 2020 from N4.2bn in Q1 2019. The recovery in Revenue was remarkable and beat our forecast as annualised Q1 2020 Revenue of N27.9bn prints above our FY forecast of N26.5bn by 5.3%. We note the remarkable recovery in Revenue was driven by increased local sales (+81.6% y/y to N6.4bn) while export sales continue to remain pressured (-12.5% to N0.6bn). The surge in local exports remains driven by the closure of the land borders which has prevented the importation of illegal olein used in crude palm oil (CPO) production. Export sales to international markets remain pressured with largest importer of CPO, India, implementing import tariffs on CPO imports into the country. CPO prices have also been trending higher with PKO price climbing 16.4% y/y to US$820.58/MT in Q1 2020.
Margins expand on the lower cost of sales
The company’s cost of sales dipped significantly, declining 69.9% y/y to N0.3bn in Q1 2020 from N0.8bn in Q1 2019. The decline in cost of sales was broad-based with the cost of sales on Oil Palm (down 67.0% y/y) and Rubber (down 84.1% y/y) declining. Against this backdrop, Gross Profit jumped 99.1% to N6.7bn in Q1 2020 from N3.4bn in Q1 2019. In the same vein, gross margin expanded by 16.3ppts to 96.4% in Q1 2020.
Operating performance strengthens despite the spike in Opex
In Q1 2020, Okomu oil recorded a significant spike in Net Operating Expenses which climbed 71.0% y/y to N3.5bn from N2.1bn in Q1 2019. The company’s quarterly financials don’t provide a breakdown of the Net Operating Expenses, however, we note higher volumes sold within the quarter would have impacted Material costs and Technical fees. Des[ite the spike in Opex, faster growth in Gross Profit ensured Operating profit accelerated 142.6% y/y to N3.2bn in Q1 2020 from N1.3bn in Q1 2019.
Finance cost jumps on higher leverage
Net finance cost jumped by 251.8% y/y to N0.2bn in Q1 2020 from N0.05bn in Q1 2019. This was primarily driven by a spike in Finance cost (up 153.7%). The growth in Finance cost was down to higher Loans and Borrowings were taken by the company to support its Capital expenditure spend. Nevertheless, Pre-Tax profits climbed 137.9% y/y to N3.0bn in Q1 2020 from N1.3bn in Q1 2019. The company has seen its Tax holiday expire and as a result, recorded a tax expense of N1.0bn rather than a tax credit of N0.3bn in Q1 2019. While this impacted on Net margin (down 7.4ppts to 29.0%), Net profit grew 31.8% y/y to N2.0bn in Q1 2020 from N1.5bn in Q1 2019.
Outlook: Outlook remains promising on volume and price growth
Volume & Price growth to sustain accelerated revenue
We remain very positive on Okomu oil going forward reflected in our 40.7% y/y forecast for Revenue growth. Our optimism ]on the company’s revenue growth is premised on strong growth in volumes and price. We forecast a 29.7% y/y growth in CPO volumes sold to 59,928MT while we forecast prices would remain sturdy with a 15.0% growth. However, we expect Rubber volumes to remain weak as we forecast a 6.3% y/y decline to 8,641MT while prices are forecasted to remain fairly stable.
EPS forecasted to print at N8.45/s
We note the company now operates higher financial leverage but remains insignificant and thus, we do not expect higher Finance cost to impact on the company’s Net Income. However, with the company’s tax holiday over, we expect Okomu oil will record higher tax expense in 2020. In addition, we note further devaluation of the naira would impact on the company’s costs. Nevertheless, we do not expect the pressures to outweigh the company’s revenue growth. Against this backdrop, we forecast a 59.7% y/y increase in Net Income to N8.1bn while we forecast EPS will print at N8.45/s in 2020.
BUY recommendation with a target price of N89.41/s
We have a target price of N89.41/s on Okomu oil which represents a 62.4% upside on Friday’s closing price of N55.05/s. We place a BUY recommendation on the stock. Our recommendation hinges on the company’s above-average fundamentals across Revenue growth, Net Income growth, Return on Equity and Low financial leverage. Our EPS forecast implies Okomu oil trades at an implied forward PE multiple of 6.5x which is a steep 174.0% discount to our peer average of 17.8x. Furthermore, the stock has a negative 1-Year return of 18.2%, with EPS forecasted to grow at 59.7%, we see the stock as deeply discounted with a decent upside.
