Neutral rating maintained
- Modest downward revisions to our estimates and price target: Okomu Oil’s (Okomu) Q3 2017 results surprised negatively – sales and PBT missed our estimates by 18% and 30% respectively. As such, we have reduced our earnings estimates over the 2017-18E period by 7% on average and our price target by 5% to N68.9. Okomu shares have returned 62% this year (NSEASI: 38%) and are trading on a 2017E P/E of 8.7x for EPS growth of 14.3% y/y in 2018E. From current levels, the shares show an upside potential of 6% to our N68.9 price target As such, we are retaining our Neutral rating on the stock.
- Gross margin weakness and tax offset double-digit sales growth: Okomu’s Q3 2017 results showed that sales and PBT grew by 22% y/y and 14% y/y to N4.1bn and N1.4bn respectively. However, PAT declined by -73% y/y due to a 3,672bp y/y expansion in tax rate. Despite a net interest income of N65m (versus a charge of –N102m in Q3 2016), PBT growth was slower than the sales growth because of a -1,093bp y/y contraction in gross margin and an 11% y/y rise in operating expense. On a sequential basis, sales declined by -38% q/q. We attribute the sales decline to seasonality. Despite the positive net interest expense figure and a 20% q/q decline in operating expenses, these were not strong enough to offset the sales decline and a -2,863bp q/q contraction in gross margin, leading to PBT declining by -69% q/q. PAT declined by a wider margin of -95% q/q due to a higher tax rate of 88% compared with 28% recorded in the preceding quarter.
- Outlook: Over the quarter, sales growth in the palm oil segment (17% y/y) was slower than growth in the rubber segment (42% y/y). The rubber segment now accounts for 23% of the company’s topline (vs 40% in 2011). Okomu’s results were behind our estimates mainly due to negative surprises on the sales and gross margin lines. Despite the surprise, the changes to our estimates are modest because our view on the sector remains positive, mainly because of the supply gap and the favorable government policies that were put in place recently. We have forecasted gross margin of around 75% for the full year and we see sales and PBT growing by 47% y/y and 77% y/y respectively.