OKOMUOIL: Equity Analysts Rate Stock Buy as FG Policy Lifts Earnings

OKOMUOIL: Equity Analysts Rate Stock Buy as FG Policy Lifts Earnings

Okomu Oil Palm Company Plc., an indigenous crude palm oil producer listed on the floor of the Nigerian Exchange delivered a strong earnings boost, analysis of its financial year 2020 scorecard showed.

Equity analysts at Meristem Securities placed a 12-month price target of N109.75 per share on the company’s stock following expectation of a better outturn in 2021.

In the pandemic year, the palm oil company boosted revenues due to low market competition for an inelastic demand nature of palm oil.

In addition, the Nigerian government land border closure policy that started in August 2019, thus engineered price increment following low competition in the local market helped income boosts.

According to its financials, Okomu oil topline was lifted 24.08% to NGN23.41 billion following an unusual condition that allowed simultaneous price and volume increase.

This growth was fueled by better crude palm oil sales, which expanded by 29.17% to NGN20.50 billion, from NGN15.87 billion in 2019.

Analysts at Meristem Securities confirmed that crude palm oil sales benefitted from the Federal Government’s border closure directive which ran from August 2019 – December 2020.

OKOMUOIL: Equity Analysts Rate Stock Buy as FG Policy Lifts Earnings

It was noted that this limit smuggling across the country’s porous borders, encouraged domestic patronage and provided local players the leeway to implement price increases as crude palm oil prices surged 22%, according to company management.

In contrast, Meristem Securities noted the company’s rubber business was severely affected by slower demand last year -consistent with the trend observed globally.

This came in addition to logistics (port-related) bottlenecks.

Analysts added that oversupply of rubber in the international market, combined with the impact of the coronavirus pandemic, which necessitated the shutdown of tyre factories worldwide, exerted downward pressure on rubber revenue.

Consequently, Okomu’s earnings from rubber exports plunged. Revenue from rubber sales down by 2.89% year on year to NGN2.91 billion from NGN2.94 billion recorded in 2019.

“While we expect local crude palm oil demand to remain strong, we are concerned that the reopening of the borders may facilitate increased smuggling of cheap palm oil into the country”, analysts stated.

Hence, Meristem Securities Limited forecasted a 12.46% year on year growth in revenue to NGN26.33 billion from NGN23.41 billion in 2020.

Revenue Growth Passes Through to Bottom Line

Meristem said the company’s production costs rose in line with revenues, up 30.78% year on year to NGN7.70 billion, particularly influenced by the significant upswing in raw material and consumable costs.

In the period, Okomu Oil raw material and consumable swelled up by 22.90% to NGN5.29 billion.

Analysts at Meristem Securities remarked that this, in turn led to a mild contraction in gross margin to 67.12%, from 68.80% in 2019.

Administrative expenses also inched higher by as much as 32.14% – as management fees increased to NGN1.91 billion from NGN1.02 billion in 2019, pushing up operating expenses to NGN6.80 billion, from NGN5.63 billion in the prior year.

Quite notably, analysts spotted that interest income dipped by 97.96% to NGN7.13 million owing to a much lower interest rate environment witnessed in 2020.

Its financial however showed that finance costs also tumbled to NGN70.23 million from NGN189.40 million in 2019, offsetting pressure from interest earnings assets.

With the Central Bank of Nigeria loan support for industry where Okomu Oil benefited, enjoyed a 5.00% reduction on its cost of debt.

Analysts said this, alongside the company’s lower effective tax rate of 4.55% as against 13.11% in 2019, contributed to bottom-line expansion.

It thus translated to an improvement in net margin to 33.23% from 26.76% recorded in the previous year.

“We see scope for improved profitability over 2021, premised on our expectation of a slight moderation in production costs, as well as favourable crude palm oil prices as business conditions pick up”, Meristem forecasted.

Again, analysts noted that a higher crude oil price environment typically bodes well for crude palm oil prices since it is a substitute for crude oil in biofuel.

Interest Coverage Ratio Sees Unusual Spike

Meristem Securities explained that although Okomu’s total debt grew from NGN8.97 billion in 2019 to NGN11.37 billion last year, finance costs slumped to NGN70.23 million from NGN450.31 million as at 9 months: 2020.

It was however noted that interest coverage surged to 126.85x from 38.83x in 2019 and 5-year average of 21.94x.  

This is partially explainable by the reduction on interest rates on both its Bank of Industry and differential cash CBN loan facilities.  

For financial year 2021, Meristem Securities projected that Okomu Oil earnings per share will come at N9.34 and target price earnings of 11.75x.

OKOMUOIL: Equity Analysts Rate Stock Buy as FG Policy Lifts Earnings

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