October 22, 2019/Cordros Report
Over Q3-19, OKOMUOIL’s revenue was supported by a blend of improved CPO (+89.1% y/y) and rubber (+71.4% y/y) sales, bucking the trend in H1-19, where both disappointing volume growth and weak CPO prices pressured revenue. We believe a material leap in volume must have aided OKOMU’s CPO revenue in the period, especially as global CPO prices moderated by 7.5% y/y in the review period. Since domestic CPO prices track global price movements, we believe the company suffered price pressure over the period. Similarly, aside from the impact of higher volume growth in the period, we believe rubber sales rode the wave of higher global prices (+1.6% y/y) as the company exports all rubber produced.
Against that backdrop, revenue expanded by 86.3% y/y – the first positive y/y growth in 5 quarters. While we do not downplay the influence of volume outturn, we believe that the impact of the low base from the corresponding period of last year amplified the magnitude of the expansion. From a quarter ago, revenue was higher by 60.4% y/y, driven by both higher CPO prices (+1.7% q/q) and volume growth.
Elsewhere, relative to revenue growth, Q3-19 COGS only rose by 3.9% y/y, setting the stage for a gross margin expansion of 6.0ppts to 92.5% – the highest in 27 quarters. In our last update – Less Than Effervescent Outlook – we had initially guided to a sustained cost pressure for the company since management typically pushes costs associated with cultivating activities into the second half of its financial year. The full impact is expected to play out in Q4. On a quarter on quarter basis, despite the volume-induced revenue jump, COGS declined sharply by 38.7% q/q, resulting in gross profit growth expansion of 84.9% q/q, with related margin expanding by 16.0ppts.
Further down, in sync with its planting season, which corresponds with elevated payroll period, Opex increased markedly by 134.7% y/y, resulting in a 10.2ppts increase in Opex-to-sales ratio. Thus, EBIT grew by 69.8% y/y. However, since OPEX growth ran ahead of revenue growth, EBIT margin dipped by 4.2pps to 43.3%. Quarter-on-quarter operating profit rose by 90.7%, even as Opex increased by 80.0% q/q.
Although finance charges (+45.2% y/y) were a notch higher relative to last year, the faster increase in finance income (+374.1% y/Y) ensured the company recorded a net finance income of NGN242.2 million (vs. finance charge of NGN3.3 million in Q3-18). We highlight both (1) higher interest on fixed deposit account (+377.2% y/y) give higher cash balance (+30% y/y), and (2) foreign exchange gains (+40.2% y/y), as the key drivers of finance income. Overall, the combination of stronger topline growth and lower COGS could not offset the impact of higher effective taxes (+253.2% y/y) and resulted in OKOMUOIL reporting 21.8% y/y and 4.0% q/q declines in EPS to NGN1.66 in Q3-19.
Comment: Unlike the performance in H1-19, OKOMUOIL’s result is strong, in our view, given better CPO and rubber volume outturn, even as it continues to face price pressure for CPO. OKOMU trades at a P/E of 9.70x — a significant discount to it’s Middle East and Africa peers’ 11.7x. Our last communicated TP was NGN87.02, which implies a potential upside of 58.4%. Our estimates are under review.