Neutral rating maintained
- Modest upward revisions to estimates and price target: Okomu Oil’s (Okomu) Q4 2017 PBT results were better than we expected owing to positive surprises on the gross margin and opex lines. As such, we have increased our earnings estimates by 8% over the 2018-19E period, and our price target by 5% to N84.5. The increase to our price target also reflects our decision to increase the terminal EBIT margin assumption in our DCF by 200bps to 31%. This year, Okomu shares have returned 8.6% and have outperformed the broad index slightly, by 1.9%. The shares are trading on a 2018E P/E of 7.8x for 9.6% y/y EPS growth in 2019E. From current levels, the shares show an upside potential of 15% to our N84.5 price target. We are retaining our Neutral rating on the stock.
- Q3 2017 PBT and PAT up 147% y/y and 222% y/y respectively: Okomu’s Q4 2017 results showed that sales grew by 7% y/y to N3.7bn. PBT and PAT advanced by 147% y/y and 222% y/y to N2.0bn and 2.5bn respectively. The strong bottom line was driven by a 2,000bp y/y gross margin expansion and a net interest income of N61m versus a net charge of –N882m in the corresponding quarter of 2016. Opex of N180m (vs. +N379m in Q4 2016) was not large enough to offset the positives. Further down the P&L, a tax rebate of N786m (vs. a charge of –N63m in Q4 2016) led to PAT before OCI growing faster than PBT, by 275% y/y. PAT after OCI grew by 222% y/y due to an OCI figure of -N222m versus +N52m in Q4 2016.
- Outlook: Similar to the prior quarter, sales growth in the palm oil segment was slower than growth in the rubber segment last quarter. Palm oil sales growth was flat y/y versus sales growth of 28% y/y for the rubber segment. Although rubber production has been on an upward trend in the past few quarters, we attribute the sales growth to pricing, driven by favorable pricing from the international market given that Okomu exports all its rubber. Notwithstanding, the palm oil segment has also been in an advantageous position in terms of pricing following the CBN’s restriction of FX access to importers. However, we believe the company’s pricing power could be at risk in the near term because of the return of importers/smugglers of palm oil who were crowded out when FX was not readily accessible and rates were not favorable. We see slower sales growth of 14% y/y for 2018E (vs. 42% y/y in 2017) and PBT growth of 16% y/y.