FSDH advises investors to Buy Okomu Oil shares for descent upside
Okomu Oil Palm Company Plc bolstered first quarter (Q1) of 2020 earnings with significant increase in local sales.
The company’s revenues jerked up more than 65% to N7 billion from N4.2 billion in the comparable period in 2019.
Due to significant improvement in performance, analysts at FSDH advised its customers to buy Okomu oil stock as it present decent upside.
FSDH Research hinged the recommendation on the company’s above average fundamentals across revenue, net income growth, return on equity and low financial leverage.
Traded at N55.05, Okomu Oil market capitalisation settled at N52.512 billion on 953,910,000 shares outstanding.
Q1 2020 earnings review
In its recently released Q1 2020 financials, Okomu Oil reported a 65.5% increase revenue to N7.0 billion in Q1 2020 from N4.2 billion in Q1 2019.
Analysts explained that the recovery in revenue was remarkable and beat FSDH forecast.
Okomu Oil annualised Q1 2020 revenue of N27.9 billion prints above N26.5 billion estimated by 5.3%.
FSDH stated that the remarkable recovery in revenue was driven by 81.6% increased local sales to N6.4 billion.
Though, the company’s export sales continues to remain pressured, it actually went down by 12.5% to N0.6 billion.
Analysts at FSDH stated that the surge in local exports remains driven by the closure of the land borders which has prevented importation of illegal olein used in crude palm oil (CPO) production.
Then, export sales to international markets remain pressured with largest importer of CPO, India, implementing import tariffs on CPO imports into the country.
CPO prices have also being trending higher with PKO price climbing 16.4% year on year to US$820.58/MT in Q1 2020.
Margins expand on lower cost of sales
The company’s cost of sales dipped significantly, declining 69.9% year on year to N0.3 billion in Q1 2020 from N0.8 billion in Q1 2019.
FSDH held that the decline in cost of sales was broad based with cost of sales (on Oil Palm down 67.0% and Rubber fell 84.1 %) declining.
Against this backdrop, gross profit jumped 99.1% to N6.7 billion in Q1 2020 from N3.4 billion in Q1 2019.
In the same vein, gross margin expanded by 16.3ppts to 96.4% in Q1 2020.
Operating performance strengthens despite spike in operating expenses, analysts remarked.
FSDH explained that in Q1 2020, Okomu oil recorded significant spike in net operating expenses which climbed 715 to N3.5 billion from N2.1 billion in Q1 2019.
“The company’s quarterly financials don’t provide breakdown of the net operating expenses, however, we note higher volumes sold within the quarter would have impacted material costs and technical fees”, FSDH stated.
FSDH explained that despite the spike in operating expenses, faster growth in gross profit ensured operating profit accelerated 142.6% to N3.2 billion in Q1 2020 from N1.3 billion in Q1 2019.
Finance cost jumps on higher leverage
The company’s net finance cost jumped by 251.8% to N0.2 billion in Q1 2020 from N0.05 billion in Q1 2019.
FSDH remarked that this was primarily driven by a spike in finance cost which increased by 153.7%.
Analysts attributed the growth in finance cost to higher loans and borrowings taken by the company to support its capital expenditure spend.
Nevertheless, pre-tax profits jumped 137.9% to N3.0 billion in Q1 2020 from N1.3 billion in Q1 2019.
The company has seen its tax holiday expire, FSDH stated and as a result recorded a tax expense of N1.0 billion rather than a tax credit of N0.3 billion in Q1 2019.
While this impacted on net margin which sloped down by 7.4 ppts to 29.0%, net profit grew 31.8% to N2.0 billion in Q1 2020 from N1.5 billion in Q1 2019.
Outlook:
FSDH stated the Okomu Oil remains promising on volume and price growth as analysts expect this to sustain accelerated revenue.
“We remain very positive on Okomu oil going forward as reflected in our 40.7% year on year forecast for revenue growth.
Our optimism on the company’s revenue growth is premised on strong growth in volumes and price.
“We forecast a 29.7% year on year growth in CPO volumes sold to 59,928MT while we forecast prices would remain sturdy with a 15.0% growth”, FSDH stated.
However, analysts expect rubber volumes to remain weak as FSDH forecast a 6.3% decline to 8,641MT while prices are forecast to remain fairly stable.
FSDH highlighted that its EPS forecast to print at N8.45.
“We note the company now operates higher financial leverage but remains insignificant and thus, we do not expect higher Finance cost to impact on the company’s net Income.
“However, with the company’s tax holiday over, we expect Okomu oil will record higher tax expense in 2020”, analysts remarked.
In addition, analysts explained that devaluation of the naira would impact on the company’s costs.
“Nevertheless, we do not expect the pressures to outweigh the company’s revenue growth”, FSDH noted.
Against this backdrop, FSDH forecast a 59.7% increase in net income to N8.1 billion while EPS is expected to print at N8.45 in 2020.
BUY recommendation with a target price of N89.41/s
FSDH have a target price of N89.41 per share on Okomu oil which represents a 62.4% upside on Friday’s closing price of N55.05.
Then, analysts at FSDH place a BUY recommendation on the stock.
The analysts’ recommendation hinged on the company’s above average fundamentals across revenue growth, net Income growth, Return on Equity and low financial leverage.
“Our EPS forecast implies Okomu oil trades at an implied forward PE multiple of 6.5x which is a steep 174.0% discount to our peer average of 17.8x.
“Furthermore, the stock has a negative 1-Year return of 18.2%, with EPS forecast to grow at 59.7%, we see the stock as deeply discounted with a decent upside”, FSDH said.
FSDH advises investors to Buy Okomu Oil shares for decent upside
