- Rubber revenue growth should drive topline expansion in FY’21
- Operating margins should mildly expand in spite of inflationary pressure
- End of loan moratorium will drive higher Finance charges
- HOLD call reaffirmed as Target price hits ₦99.98
Higher rubber prices should rescue flattish CPO Revenue
OKOMU OIL released its unaudited FY’20 results yesterday, reporting an impressive earnings outperformance, largely driven by costs containment and a lower-than-expected tax expense.
The CPO producer, like its peers, benefited largely from the food supply shortage caused by the closed borders which saw CPO prices jump by over 50% in some parts of the country. Accordingly, Oil Palm Revenue surged 29% y/y to ₦20.5 billion in FY’20 (Vetiva: ₦21.8 billion).
Meanwhile, plagued by persistent pressure on global rubber prices due to the impact of the pandemic, OKOMUOIL reported a 3% y/y drop in Rubber revenue to ₦2.9 billion, albeit still ahead of our ₦2.5 billion expectation. Combined, the manufacturer reported a 24% y/y jump in FY’20 topline to ₦23.4 billion, 4% below our ₦24.3 billion estimates.
Just as we stated in our FY’21 outlook report titled, “Navigating Unsteady Terrain”, the reopening of land borders at the close of 2020 should place domestic CPO prices under pressure in 2020 as cheaper smuggled products flood the market.
That said, still-rising CPO prices in the global commodity market, as well as currency weakness in the parallel market (Oil palm importers have to rely on the parallel market to fund imports), should create a floor for prices in FY’21. All in, we forecast a 0.4% y/y drop Oil Palm Revenue to ₦20.4 billion in FY’21.
Revenue from Rubber sales on the other hand should see some joy as demand for Rubber and consequently Rubber prices rise in FY’21. We forecast a 25% y/y growth in Rubber Revenue to ₦3.6 billion, taking total Revenue 3% higher to ₦24.1 billion.
Stronger topline drives bottom-line growth
Meanwhile, in spite of inflationary pressures from the pandemic and FX devaluation, OKOMUOIL reported a 16% y/y jump in FY’20 EBIT to ₦8.5 billion, barely 2% off our ₦8.4 billion expectation. With the yield on fixed income assets falling in 2020, OKOMUOIL’s finance income & costs fell 98% and 63%y/y, taking Net finance costs to ₦63 million, down from a Net finance income of ₦159 million in FY’19.
Despite the fall in finance income, PBT still expanded 12% y/y to ₦8.5 billion, supported by the stronger topline. After accounting for a less-than-expected tax expense of ₦1.1 billion (Vetiva: ₦2.0 billion), PAT printed at ₦7.4 billion, 46% higher y/y and ahead of our ₦5.7 billion PAT estimate.
Valuation improves on Revised metrics
After accounting for the FY’20 results, we have made a couple of adjustments to our model and our FY’21 estimates. In spite of rising inflationary pressure on costs, we forecast a 40bps expansion in operating margin to 37%, largely boosted by the rising proportion of rubber revenue in FY’21.
In absolute terms, operating profit is expected to jump 4% y/y to ₦8.8 billion even as EBIT jumps 6% y/y to ₦9.0 billion. With the moratorium period on the ₦10.0 billion DCRR loans set to expire in FY’21, we expect Net Finance costs to jump 18x y/y to ₦1.2 billion, taking PBT 7% lower y/y to ₦7.8 billion and PAT 16% lower y/y to ₦6.2 billion. We value OKOMUOIL at a 12-month TP of ₦99.98 and place a HOLD on the stock.