Topline Analysis: CPO production expansion spur Revenue growth
OKOMU OIL revenue for 9M-2020 jumped 19.8%y/y to N18.6bn. The increase was fueled by the continuous closure of land border which has reduced the activities smuggler of lower CPO, FX scarcity which has curtailed imports and creates an avenue for local players to increase CPO prices and also drive volume in a bid to meet the growing demand in the country.
Notably, the Q3-2020 standalone revenue saw a decline of 27.0% to N5.1bn, this was due to the high base effect of the corresponding quarter in 2019. Analysing the 9M revenue further, we observed that the growth was buoyed by local sales as revenue from domestic sales grew 27.4%y/y to 16.7bn while the export sales (rubber) declined by 20.4%y/y to 2.0bn, WSe attributed the decline in rubber sales to the combination of lower rubber prices and volumes.
On volume, it was clear that OKOMU’s rubber production maxed out in 2019 as the company planted an additional c.1,500 hectares, to fully exhaust its total land area for rubber plantation. Hence, we expect rubber production to remain tepid in the near term.
Cost of sales Analysis: Cost reduction buoyed gross margin
The cost of sales declined 2.5%y/y to settle at N2.2bn. A deeper look at the cost of sales revealed that CPO cost of sale increased by 3.7% to 1.9bn, while rubber cost saw a significant decline of 32.7% to 0.02bn. The cost of sales saw a huge decline in H1-2020 which was due to the harvest season of company which always make the company to incur lower cost in first half of the year.
While the Q3-2020 cost of sales saw a spike of 104.8% to N1.1bn. However, the huge decline in cost of sales in H1-202 was still able to relief the pressure on gross profit. The gross profit increased by 23.5%y/y to N16.5bn. Notably, the finance cost skyrocketed by 109.4%y/y to 0.5bn amid a significant decline in finance income by 97.2%y/y to N0.01bn.
Balance Sheet Analysis
To further give context to the impressive performance of OKOMU, the company reported
a 89.5%y/y spike in Cash & Cash Equivalence to N5.1bn. Borrowings grew by 33.6% to
N11.0bn, this clearly speak to the surge seen in finance cost as highlighted above. Worthy
of mention, total assets surged by 13.5%y/y to N49.5bn, net asset trailed same path to
record a growth of 7.2%y/y to N31.3bn.
Outlook: Brighter days ahead
For the rest of 2020, we are positive about the company and we expect growth in revenue to be fueled by continued volume growth as the firm continue to leverage in its strong brand to push more to the market coupled with ongoing FX scarcity that will discourage import. Hence, we forecast revenue growth of 23.7% y/y to N23.3bn. Notably, our growth in revenue is expected to be driven by CPO volume growth.
This is further supported by the c.9,000 hectares of mature plantation from its extension II highlighted above. Also, we expect Cost of Sales growth to come lower compare to revenue growth, hence, gross margin is expected to be strengthen. OKOMU OIL currently trades at a forward EV/EBITDA of 6.6x, which is well below EM peers average of 9.6x. Putting the
above together, we revised our valuation assumption at 12M-TP of N88.0/share with a
potential upside of 10.0% when compared to the current price of N80.0/share.