- Record high earnings on strong CPO prices
- Low base, weaker naira, higher volume lift rubber export earnings
- Management declares DPS of ₦3.00 (Vetiva: ₦2.00, FY’16: ₦2.00)
- Strong growth rate to slow on lower commodity pricing outlook
- Target Price revised to ₦76.47 (Previous: ₦80.68).
Significant y/y growth across line items, PAT 21% ahead of estimate
OKOMUOIL recently released FY’17 results showing strong y/y growth across all line items and mostly in line with our expectations. Largely buoyed by strong domestic Crude Palm Oil (CPO) prices (average price up 38% y/y), FY’17 revenue from the Oil Palm segment rose 40% y/y to a record high ₦17.1 billion (5% behind Vetiva estimate) amidst a mild 2% y/y growth in CPO volume to 36,985 MT. Although the cost of sales per tonne (up 17% y/y) was pressured by the impact of currency devaluation on imported spare parts and inflationary pressures, the segment’s Gross Profit still rose 46% y/y to ₦13.8 billion – albeit 6% behind our estimate. The Rubber segment (largely for export) reported a much stronger topline growth, up 45% y/y to ₦3.2 billion (Vetiva: ₦3.1 million), flattered by the low 2016 base. This was supported by currency depreciation, higher international rubber prices and a 14% increase in the volume of rubber processed, Overall, total revenue rose 40% y/y to ₦20.3 billion, 4% behind our estimate, whilst Gross Profit increased 49% to ₦16.0 billion, 6% behind our estimate. However, with OPEX (as a % of sales) contained better than expected (FY’17: 25% vs Vetiva: 31%), FY’17 EBIT (up 60% y/y to ₦11.1 billion) topped our estimate marginally by 2%. Overall, with a lower than expected effective tax rate of 18% (Vetiva: 29%, 9M’17: 30%), PAT (up 89% y/y to ₦9.1 billion) came in 29% ahead of our ₦7.6 billion estimates.
Valuation revised lower on dimmer commodity price outlook
Given our outlook of weaker CPO prices in 2018, we expect earnings to be capped amidst sticky volume growth. Particularly, we note consensus forecast of a 10% decline in global CPO prices over the course of the year, given weaker demand outlook in India and China, as well as stronger supply (due to favorable weather condition) in Malaysia and Indonesia. Also, the significant improvement in FX market liquidity since last year is expected to persist due to the positive outlook on Nigeria’s FX inflows and should support import (including oil palm products), further fueling competition. Consequently, we anticipate some pressure on domestic CPO prices; in fact, OKOMUOIL already announced a 16% price cut in February. Furthermore, we highlight that management guided to lower FY’18 earnings, citing the growing oversupply in the domestic market due to a surge in imports. The 2018 outlook for global rubber prices (down 22% ytd) is likewise subdued amidst fears of a global supply glut. Meanwhile, OKOMUOIL’s CPO and rubber volume growth are expected to remain modest in the short term as most of the recent plantings are not expected to roll into maturity phase until around FY’21/22. Consequently, we revise our FY’18 revenue to ₦18.7 billion (Previous: ₦20.7 billion). Similarly, we revise our OPEX estimate lower on the back on OKOMUOIL’s increasing usage of energy supply from the national grid in place of the company’s more expensive non-gas fired energy sources. Overall, we cut our FY’18 PAT estimate to ₦8.1 billion (Previous: ₦8.5 billion). Importantly, we note that OKOMUOIL’s expansion plan remains on track; an order for the first of two 30t/hour oil mills has been placed and is expected to be commissioned by 2020. Notwithstanding, largely due to a dimmer outlook on CPO prices, we revise our target price lower to ₦76.47 (Previous: ₦80.68).