Okomu Oil: Earnings remain strong despite seasonal slowdown
November 17, 2016 | 12:00 am| | | Start Conversation
Similar to recent earnings from listed peer, Okomu Oil’s 9M’16 results came in strong with PBT up 100% y/y to N5.1 billion, 6% ahead of our estimate.
As expected, Q3 revenue from the Oil Palm segment came off the Q2 record numbers (down 29% q/q to N2.7 billion) as seasonal effect weighed on volume; H2 is traditionally an off-peak period for Crude Palm Oil (CPO) production.
When compared to the corresponding period of 2015 however (for better comparison), the 3-month Oil Palm revenue was up 27% y/y on the back of strong local CPO prices.
Q3 revenue from the Rubber segment (export) also increased 5% y/y to N653 million largely supported by weaker naira which offset the impact of lower rubber prices. OKOMUOIL’s overall 9M revenue rose 41% y/y to N10.9 billion, slightly below our N11.4 billion estimate.
Earnings growth outlook remains strong
Given that palm oil remains on the list of 41-items excluded from accessing official FX market, the outlook for oil palm pricing remains positive and key in driving OKOMUOIL’s earnings in coming quarters.
Moving away from prices however, we should highlight that we are equally positive on OKOMUOIL’s organic growth outlook given management commitment to expansion projects. We understand that 4,000ha of the 10,000ha Extension 2 (latest acquired plantation) have been planted with oil palm seedlings till date. In 3-4 years’ time when the oil palm trees begin to yield oil palm fruits in commercial quantity, we expect to see growth in CPO production.
Also, with the government still quite bullish on agriculture as a viable revenue diversification route, coupled with its increased drive to support local production, we expect OKOMUOIL to continue benefiting from protectionist policies in the near term. With this expected to keep local CPO prices strong, we improve our already positive outlook on earnings from OKOMUOIL’s oil palm segment.
On the rubber front, we highlight that international natural rubber prices have increased by 27% from August low amidst a couple of factors – strengthening car sales in China (largest consumer of rubber), concern on output from Thailand and an uptrend in price of synthetic rubber (substitute to natural rubber). Coupled with exchange rate impact, we expect further margin improvement from the OKOMUOIL’s rubber segment.
Valuation revised higher despite cautious stance on Q4 earnings
Notwithstanding the more positive outlook on the rubber segment in Q4, we cut our FY’16 revenue forecast to N14.6 billion (Previous: N15.1 billion) as we further factor in the off-peak period effect of the oil palm sector in our model. Also, we take a cautious stance on Q4 earnings as we make provision for higher quarter’s cost of sales (as a % of sales) in line with the spike observed in Q4’15 (111% of sales) amidst recognition of development costs in Extension 2.
We note that more work has been done on the Extension 2 in 2016, however, 9M’16 cost of sales (as a % of sales) remains modest at 12% (9M’15: 16%). Be that as it may, FY’16 earnings will come in as record high, even as 9M earnings have already surpassed FY’15 level. We maintain our FY’16 PAT at N4.9 billion. Our target price has however been revised slightly higher to N48.81 (Previous: N45.18), supported by our improved post-2016 earnings outlook.
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