OKOMU Oil: Brighter Day Ahead as Border Closure Offers Market Edge
With about 95% of its 953.91 million shares outstanding floated, Okomu Oil Plc market capitalisation has stayed at N76.312 billion in the last 7-day trading session in the local bourse.
However, United Capital research analyst Oluwashina Akinremi has spotted brighter day ahead as the leading crude palm oil producer continues to enjoying market advantage from land border closure.
With large consumers base, Okomu Oil has been able to raise price without losing volume, an advantage confers from government protectionist policy.
According to the analyst, Okomu Plc.’s Crude Palm Oil (CPO) production expansion spur revenue growth in its 9-month of financial year 2020 earnings release.
For the period, OKOMUOIL revenue jumped 19.8% year on year to N18.6 billion.
However, United Capital projected about 24% year on year increase in revenue to N23.3 billion in 2020.
United Capital Analyst Akinremi stated that the increase was fueled by the continuous closure of land border.
Significantly, this has reduced the activities smuggler of lower CPO, and FX scarcity has curtailed imports and creates an avenue for local players to increase CPO prices.
Players in the industry has also been able to drive volume in a bid to meet the growing demand in the country.
Notably, it was observed that the Q3-2020 standalone revenue saw a decline of 27.0% to N5.1 billion.
In his research note, United Capital’s Akinremi attributed this to the high base effect of the corresponding quarter in 2019.
Analysing the 9M revenue further, United Capital observed that the growth was buoyed by local sales as revenue from domestic sales grew 27.4% year on year to N16.7 billion.
Meanwhile, the export sales (rubber) declined by 20.4% year on year to N2.0 billion, United Capital attributed the decline in rubber sales to the combination of lower rubber prices and volumes.
On volume, it was clear that OKOMU’s rubber production maxed out in 2019 as the company planted an additional about 1,500 hectares, to fully exhaust its total land area for rubber plantation.
“Hence, we expect rubber production to remain tepid in the near term”, United Capital stated.
Down the line, Okomu Oil cost reduction buoyed gross margin in the period.
The company’s unaudited result showed that company’s cost of sales declined 2.5% year on year to settle at N2.2 billion.
A deeper look at the cost of sales revealed that CPO cost of sale actually increased by 3.7% to N1.9 billion, while rubber cost saw a significant decline of 32.7% to N0.02 billion.
However, Okomu Oil Plc saw a huge decline in cost of sales in the first half of (H1) 2020 which analyst said was due to the harvest season.
This has always make the company to incur lower cost in first half of each year.
While the Q3-2020 cost of sales saw a spike of 104.8% to N1.1 billion.
Read Also: Review of Border Closure Policy Key to Assess Cost, Benefits –Vetiva
However, the huge decline in cost of sales in H1-2020 was still able to relief the pressure on gross profit.
The gross profit increased by 23.5% year on year to N16.5 billion.
Notably, the finance cost skyrocketed by 109.4% to N0.5 billion amid a significant decline in finance income by 97.2% to N0.01bn.
To further give context to the impressive performance, the company reported a 89.5% year on year spike in cash & cash equivalence to N5.1 billion.
Borrowings grew by 33.6% to N11.0 billion, analyst Akinremi stated that this clearly speak to the surge seen in finance cost.
Worthy of mention, total assets surged by 13.5% year on year to N49.5 billion, net asset trailed same path to record a growth of 7.2% to N31.3 billion.
Outlook:
United Capital said, “Brighter days ahead for the rest of 2020, we are positive about the company and we expect growth in revenue to be fueled by continued volume growth as the firm continue to leverage in its strong brand to push more to the market.
“This, coupled with ongoing FX scarcity that will discourage import.
“Hence, we forecast revenue growth of 23.7% year on year to N23.3 billion”.
United Capital explained that growth in revenue is expected to be driven by CPO volume growth.
Analyst Akinremi added that this is further supported by about 9,000 hectares of mature plantation from its extension II.
“Also, we expect cost of sales growth to come lower compare to revenue growth, hence, gross margin is expected to be strengthen”, the firm explained.
According to analyst research, OKOMUOIL currently trades at a forward enterprise value (EV) to earnings before interest tax depreciation and amortisation (EBITDA) of 6.6x, which is well below emerging market peers average of 9.6x.
“We revised our valuation assumption at 12-month target price of N88.0/share with a potential upside of 10.0% when compared to the current price of N80.0/share”, United Capital stated.
Profile: Okomu Oil Palm Company Plc is a Nigeria-based company engaged in cultivation of oil palm, processing of fresh fruit bunches into crude palm oil for resale, rubber plantation and processing of rubber lumps to rubber cake for export.
OKOMU Oil: Brighter Day Ahead as Border Closure Offers Market Edge
