Neutral rating maintained despite strong Q2
- Modest upward revisions to our estimates and price target: Okomu Oil’s (Okomu) Q2 2017 results came in stronger than we expected mainly because of a positive surprise on the gross margin line. Consequently, we have increased our earnings estimate over the 2017-18E period by 10% on average and our price target by 27% to N72.4. The increase to our price target is much higher because we rolled over our DCF valuation to 2018. Okomu shares have returned 81% this year (NSEASI: 38%) and are trading on a 2017E P/E multiple of 8.0x for EPS growth of 5% y/y in 2018E. From current levels, the shares are trading close to our fair value estimate of N72.4 As such, we are retaining our Neutral rating on the stock.
- Q2 2017 PBT and PAT up 94% y/y and 58% y/y respectively: Okomu’s Q2 2017 results showed that sales grew by 56% y/y to N6.6bn. PBT and PAT of N4.4bn and N3.2bn advanced by 94% y/y and 58% y/y respectively. Although net interest costs and operating expenses increased by 50% y/y and 16% y/y respectively, these were not strong enough to offset the strong sales growth and a 250bp y/y gross margin expansion to 99.7%, leading to the PBT growth. The PAT growth was slower due to a higher tax rate of 28% compared with 12% in Q2 2016. On a sequential basis, sales grew by 12% q/q, which we attribute to seasonality. The end-Jun quarter is usually the strongest quarter for the palm oil companies. Due to the q/q sales growth and a 2,109bp q/q gross margin expansion, PBT advanced by 30% q/q, despite a 64% q/q increase in operating expenses. PAT growth slowed to 3% q/q on the back of a higher tax rate (versus 10% recorded in the prior quarter).
- Outlook: Okomu’s palm oil business recorded sales growth of 59% y/y while the rubber business grew sales by 23% y/y during the quarter. The rubber segment now accounts for just 8% of the company’s topline (vs 40% in 2011). As such, the palm oil business remains the driver of growth. Okomu’s Q2 2017 results were ahead of our estimates mainly due to better-than-expected gross margin of 99.7%. However, we do not believe this level will be sustained for the balance of the year due to seasonality. Okomu’s peak season is the end-March quarter and the company usually has higher maintenance costs in the off-peak seasons. We have forecasted gross margin of around 80% for the full year and we see sales and PBT growing by 54% y/y and 97% y/y respectively.