The Okomu Oil Palm Plc Q1 19 numbers released earlier this week, came
with few surprises to us, with the major one being the more than
expected decline in revenue over the period. Beyond doubt, the numbers
can only be tagged a “Worrisome start to the year” as the company
reported its weakest first quarter performance since 2014. Going by
our communication with management, the poor performance stemmed
largely from material erosion in global crude palm prices when
compared to same period in the prior year and the increasing influx of
lower priced CPO into the country. Beyond the obvious, we believe the
high base in the prior year (due to bumper harvest and a much more
favorable pricing) further magnified the material revenue crunch.
With the Q1 numbers signaling a bumpy year ahead, we have updated our
models accordingly. Particularly, with year to date appreciation in
global CPO prices still far from the level in the prior year and
growing intensity of smuggled CPO, we expect local CPO prices to
remain depressed over 2019. Worthy of note, while large corporates
typically have controlled quality on the use of CPO and palm olein
products, our market check suggests that much smaller corporates and
individual households (which in our view accounts for the largest
share of consumption) are not as concerned about the quality of CPO
and its end products. With this in mind and our understanding of the
need of management to empty its excess tank over Q2, guides our
expectation of 13% YoY decline in domestic CPO price to N337,620.
Proshare Nigeria Pvt. Ltd.
On volumes, with our discussion with management suggesting that only
~54% of volumes produced over Q1 19 were sold, we see further pressure
on volumes over the rest of the year. Specifically, while we expect
some pick up over Q2 19, we believe volume will remain depressed for
most part of the year and thus estimate a 12% YoY decline. Beyond
2019, we believe better volumes and relatively flat price will be
central to revenue growth. We remain broadly optimistic on volumes
growth over the medium-term stemming from management’s decision to
nurture the first set of acreage area staged to mature in 2019 in
anticipation of reaping better yields in 2020. This takes into
cognizance commissioning of a new 30 ton/hour oil mill in extension 2
in 2021 and 2023 which should bring its total oil mill capacity to 135
ton/hour in 2023. Hence, we have raised our FY 20-23F sales forecast
by 16% (Previous: 12%) on average.
Proshare Nigeria Pvt. Ltd.
Medium term gross margin expansion on the cards. In line with our
expectation for lower CPO volumes over FY 19E, we forecast 2019
production cost to decline 19% YoY to N4.1 billion (Cost to sales
ratio: 25%) which translates to a gross margin compression of 20bps
YoY to 75%. However, given our expectation for cost savings from the
acquisition of a 5MW turbine and room for a better economy of scale
emanating from the production of higher volumes over our forecast
horizon, we lower FY 20-23E Cost to sales forecast to 22% on average.
Consequently, we model 400bps expansion in EBIT margin over our
forecast horizon.
According to management, Okomu is averse to expensive credit facility
and hinted at limiting its source of financing to CBN, BOI or other
concessionary sources. This in addition to the lower interest rate
environment informs our expectation of slower increase in interest
expense by 5% YoY to N308 million in 2019. Cumulative impact of our
adjustments translates to double-digit decline in EPS to N6.75 (-24%
YoY) over FY 19E.
Factoring the gloomy expectation for 2019 into our model, we cut our
FVE by 22% to N75.60 and downgrade to a NEUTRAL rating. Okomu trades
at a forward P/E of 10.6x relative to 9.2x for Presco and Bloomberg
Middle-East and Africa (MENA) peers of 12.94x.
