Okomu Oil: Analysts Project 20% Upside For Stock, See Increase Dividend

Okomu Oil: Analysts Project 20% Upside For Stock, See Increase Dividend

Okomu Oil (Ticker: OKOMUOIL) was traded at N110 in the Nigerian Exchange, having stayed in that position for seven trading sessions but analysts have set a 12-month price target at N131.50, representing about 20% upside. Equity analysts’ optimism for the ticker remains stronger due to its better earnings profile – supported by the Nigeria economics dynamics.

The crude palm oil (CPO) company is benefiting from lower than usual competition since August 2019 when the Nigerian government locked its border against an influx of products through the land borders, since then, the CPO producer has gained weight economically.

Indeed, the company’s results were better than expected due to an increase in price, while a slowdown in the competition widens the total market size available to cut pies. For the oil palm industry, fundamentals appear stronger than ever.

In its equity report on the ticker, the CardinalStone Securities analysts team led by Phillip Anegbe and Kayode Eseyin have upgraded the company’s estimate – this time with a positive outlook following a strong earnings beat in the first half of the financial year 2021.

In the first half, Okomu Oil revenue expanded more than 74%, from N15.53 billion in the comparable period last year to N23.63 billion. This was driven by improved demand amidst upward price adjustments in the last two years.

The company’s share of the palm oil sales has levelled up since border closure that made smuggled substitutes expensive and Okomu and few other producers have continued to dominate the space while steep headline inflation provides a veritable reason for a price increase.

Okomu Oil earned N10 per share outstanding in the first half, a 138.1% year on year growth compared with N4.20 that was declared in the comparable period in 2020. Basically, the company’s earnings per share (EPS) growth was supported by topline expansion and lower finance costs.

Equity analysts’ optimism about the company’s earnings outlook keeps the stock on buying list while the financial 2021 estimate was raised. In the equity report, CardinalStone analysts said they raised the 2021 earnings forecast to N17.6 billion, from N14.6 billion

The investment firm also makes additional adjustments to sales expectations given an improved fundamental, and financial upshot in the first half which came rather better than expected amidst cat walking economic rebound.

Analysts said the adjustment to profit after tax reflects higher than expected crude palm oil prices and output in the period, On the whole, the adjustments resulted in an increase in our 12-month target price to N131.55 about 17% higher than N111.25 previously projected.

OKOMU is likely to grow revenue by 94.3% year on year in 2021, analysts at Cardinalstone said, on an expected impact of higher crude palm oil prices and volumes.

To be clear, analysts explained that crude palm oil prices have already rallied by 101.0% since July 2020 and the imposition of higher levies on Indonesian palm oil exports suggests that this rally may persist through the current year.

CardinalStone said the company has indicated an expectation of an average crude palm oil price of N650,000 in 2021 compared to N360,000 in 2020, corroborating analysts view.

In addition to this potential price support, higher volumes from the new Extension 2 estate and the planned commissioning of a new 30t/hr oil mill could portend further upside to OKOMU’s top-line growth, CardinalStone noted.

Specifically, the investment firm said the latter could expand the firm’s fresh fruit bunch (FFB) processing capacity. To this point, analysts expressed the view that in addition to the processing of FFBs from Extension 2, the new mill is likely to cater for surplus Extension 1 FFB output that has hitherto been sold.

Furthermore, there is also an expectation that the top-line will be supported by growth in the rubber segment, which analysts said typically accounts for about 15.0% of total revenue.

“We forecast a two-fold surge in rubber revenue to N5.1 billion in 2021, after factoring in the potential impact of higher global prices and foreign exchange devaluation”, analysts at CardinalStone remarked.

Despite the outturn in the first half OF 2021, Okomu Oil gross profit margin moderated, albeit marginally, from 92% in the comparable period in 2020 to 91.8%. However, profit after margin expanded strongly to 40.4% from 29.6%.

Meanwhile, analysts at CardinalStone again expressed optimism that in the financial year 2021, margins are likely to improve across the board partly due to the expected surge in top-line.

In addition, they noted that the company’s margins could be supported by the planned commissioning of energy savings projects, such as the 5MW turbine, which management projects could lead to 25.0% energy cost savings.

“We see legroom for an 8.9 percentage point expansion in gross margin to 77.7% for full year 2021”.

Analysts at CardinalStone are expecting Okomu Oil to report an all-time high EPS of N18.44 in the financial year 2021, represents a 126.1% growth from the N8.15 reported in 2020.  

This projection is anchored on the company’s strong top-line growth and energy cost savings, adding that the higher EPS expectation could cascade to a record return on equity of 44.9% from 24.3% in the full financial year 2020.

Historically, Okomu Oil often increases dividend payments on better earnings. Thus, analysts see that a materially higher EPS is likely to lead to a higher 2021 dividend.

Looking at the last five years, it was spotted that the company’s dividend payout ratio has averaged 52.0% while for 2020 dividend pay-out was 85.8%.

Assuming a conservative payout of 50.0%, CardinalStone analysts projected a dividend of N9.22 for 2021, which translates to a yield of 8.5% on the current market price. Effective implementation of this would depend on cash position in the period.

However, analysts think that improved collections will boost the company’s cash position. In the first half of 2021, the company’s cash position improved 76.0% to N8.3 billion, supported by improved working capital management.

This was supported by how quickly the company was able to convert sales to cash given the size of receivable based on its credit policy.

To this point, analysts note the reduction in receivable days to 11.5 days from 15.65 days as of 2020. The cash conversion cycle has also remarkably fallen to 99 days, analysts added. Cash conversion peaked at 215 days in 2017 while the 5-year average cash conversion cycle was 145 days.

Analysts added that the company’s free cash flow or distributable cash flow is also expected to be robust, supported by a 2.5x jump in operating profit, and more contained capital expenditure and working capital investments.

“Our weaker capital expenditure expectation is premised on the completion of two key projects – a 30t/hr oil mill and a 5Mw turbine, both of which are set to be commissioned in August/ September 2021”, analysts explained.

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Okomu Oil: Analysts Project 20% Upside For Stock, See Increase Dividend