OKOMUOIL FY 2018: Weaker Pricing Weighs on Earnings

April 9, 2019/InvestmentOne Report

§  Flat Revenue: down marginally by 0.02% y/y.

§  Weaker Gross profit margin: down 560bps y/y.

§  Stable OPEX to sales ratio: down 42bps y/y.

§  Lower PBT performance: down by 7.20% y/y. 

Recently, The Okomu Oil Palm Plc published its FY 2018 results, which were reflective of the impact of trade war and lower demand from India on global prices of Crude palm oil and rubber. We highlight that the price of Crude Palm Oil and Rubber fell by 16%y/y and 13% y/y in 2018 according to the management. 

On the other hand, lower than expected demand from Consumer Goods producers on the back of weak consumer spending could have slowed sales growth as management highlighted that there was a tightening of inventories among downstream users of their products. Similarly, stability in the FX market could have encouraged importers of crude palm oil to increase their imports as they can easily source for FX in the parallel market. This could have reduced the market share of Okomu and Presco in 2018. 

As such, turnover was somewhat flat as it declined marginally by 0.02%y/y to N20.57billion in FY 2018 with the revenue from Rubber falling by 8.60%. However, revenue from Crude Palm Oil (CPO) remained flat having increased marginally by 0.79%. We highlight that higher crude palm oil volume, though weak, could have supported the increase in turnover from CPO. 

Lower Prices Pressure Gross Profit Margin

The company’s result showed a 7.20% y/y decline in PBT to N10.34billion in FY 2018 driven by a 560bps y/y decline in gross profit margin to 73.55%. This may be the result of the fall in prices of Crude Palm Oil and Rubber in the international commodities market. We highlight the company benchmarks its prices in the local market against prices at the international market. In the same vein, an 8% increase in oil milling costs due to the rise in imported spares could have weighed on margin in FY 2018. 

Weaker Margin Weighs on Better Finance Income

Moving down to the P& L line, the 42bps y/y decline in OPEX/sales to 23.80% and a jump in net finance income to N61million (vs N12million in FY 2017) reduced the impact of the fall in gross profit margin. We believe the lower interest environment in 2018 compared to 2017 could have led to the fall in finance income in 2018.  

In the same vein, we believe the repayment of the company’s foreign exchange loan in Q1 2018 could have reduced the company’s cash position compared to 2017. We highlight that the company repaid about N78.77million of its foreign loan in Q1 2018. Overall, the company recorded a 395bps y/y decline in PBT margin to 51.03% which drove PBT down by 7.20% to N10.34billion in 2018. 

Summary And Outlook 

Overall, the results were headlined by lower pricing, which weighed on revenue despite a moderate improvement in sales volume (CPO).

Going forward, we expect the company to continue to leverage on the supply deficit in the local market, which has been supported by the government’s exclusion of importers of crude palm oil from the official foreign exchange market. 

In the same vein, we expect the company’s rubber expansion plan to help to diversify its revenue base and generate foreign exchange income which may be used to hedge against the company’s FX exposure. Similarly, we believe the newly commissioned plant, Extension 2 Estate in Q2 2018, may increase the company’s production capacity and support its top line performance in the long run. We highlight that the company has completely planted all arable areas and no further land for palm is available again. 

Similarly, we opine that the newly erected 5mega watts turbine at the oil mill may improve margin in the near term as it is expected to generate enough power for both Okomu and Extension 1 thus reducing higher energy cost from third party. This may be supported by the newly erected wood boiler which is expected to lower rubber processing costs by about 15% in 2019 according to the management. 

In the same vein, the expected improvement in consumer spending in 2019, on the back of minimum wage increase, could improve demand for crude palm oil particular for the production of other consumer goods. However, we highlight that the feedback from consumer names on potential increase in volume in H2 2018 has been uninspiring. 

However, the company’s plan to increase the salary of staff by 15% for the next three years may increase the opex/sales which could negatively affect the PBT margin going forward given that wages and salaries are about 40% of the operating expenses.  

Similarly, stability in the parallel FX market may encourage importation of crude palm oil thus reducing the current supply deficit gap in the long run. This may be negative for both volume and prices thus affecting revenue growth in the near term.  

In the same vein, the company’s plans to borrow for expansion could increase its finance cost, which may lead to lower PBT margin going forward. However, the impact of this borrowing on finance cost may be limited as it would be borrowed from the Bank of Industry at a single digit rate. 

Our pricing model is under review. 

The Okomu Oil Palm FY 2018 figures. YE: DEC 31 (N’ millions)

FY 2018

Y/Y

Sales

20,257.67

-0.02%

Cost of Sales

-5,359.06

26.80%

Gross Profit

14,898.61

-7.09%

Gross margin

73.55%

-560bps

OPEX

-4,822.20

-1.75%

Opex/sales

23.80%

-42bps

Net Interest Income (Expense)

61.07

411.05%

PBT

10,337.16

-7.20%

PBT margin

51.03%

-395bps

Tax Credit/ (Expense)

-1,835.32

-7.88%

Tax rate

17.8%

-13bps

PAT

8,501.84

-7.05%

PAT margin

41.97%

-317bps

Source: Company financials, Investment One Research

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