Okomu Oil Plc is currently the toast of the market and the reason for that is not far fetched. They have proposed a dividend per share of N7 and a bonus issue of one for one. People like these sort of freebies and would die to be part of it. But is this justified? Okomu Oil released their 2012 Audited Accounts (IFRS) with revenues dipping 8.8% to N10.1billion. Gross Profit was however better rising slightly by 3% to N8.2billion. Profit After Tax however, dropped slightly to N3.59billion (2011:N3.9billion).
So what’s with this result?
First a little about Okomu Oil. They are a leading oil palm producing company in Nigeria and have been in operation since 1979. They were privatized sometime in 1990 and have consistently delivered on profits over the last 10years. This year too saw robust profit of N3.6billion 8.5% lower than what was achieved in 2011. The reason for this is explainable . Firstly, the company saw a slight dip in revenues from N11billion to N10billion even though in the last five years revenues have grown with a CAGR (Compounded Annual Growth Rate) of 19% growing from N4.7billion in 2008 to N10.1billion in 2012. In fact it jumped from N6billion to N11.1billion in 2011 alone, the highest jump in its history, mainly due to a 144% jump in export earnings from Rubber. So 2012, may just be a slight blip or some correction in revenue expectability. Another reason could be the drop in inventory turnovers, as they only turned inventories1.7X in 2012 compared to 2.85x in 2011. Thus, it took them an estimated 207days to clear inventories as against 127days in 2011.
Secondly, profitability however failed to beat 2011’s record of N3.9billion due to rising operational cost. Employee cost rose sharply by 25% to N1.97billion probably as a reward to employees after the magical 2011. Other expenses also jumped to N1.6billion (2011: N1.35billion). So whilst revenue dipped slightly, operating cost rose. Luckily, PAT was still N3.5billion thanks and in no small measure to a huge drop in cost of sale. It could be that they have finally found a way to reduce direct export cost maybe due to various incentives available to export oriented business in the last year or so. Their annual report when published will help explain this.
Should Shareholders be worried about this performance?
Despite the drop in revenue and rising cost, this result probably represents the reality of the current business environment they will be operating in. Investors also, should not see this as a bad result but should view the result in a larger context and ask if shareholder value was impaired. So far, that didn’t seem to have happened. Operating profit margins are high and so is profit margin. In fact, for every N100 in revenue they make a profit after tax of N35.4 (2011: N35.3). Return on Average Equity (ROAE) was 16% and if you deduct accounting entries brought about by IFRS, it rises to 23.6%. The company is also debt free with Equity making up 81% of total assets. The company also sits on a cash machine, generating N5billion in operating cash in 2012 (2011: N4.5billion). It currently sits on N3.9billion of cash enough to pay dividends estimated at about N3.3billion (almost all of the earnings made this year). On the back of this, Investors should be ecstatic. They could have still made shareholders happy without even giving out bonus shares. The Bonus payment may just be a trio objective to rewarding existing shareholders by distributing part of its revenue reserves of about N17.6billion whilst also increasing the liquidity of their stock. This will also boost return on equity in the coming years.
Is it worth buying?
Now this may depend on your appetite. The share price has risen over 216% in the last year and currently trades at N95. In terms of whether it is expensive it sure isn’t considering the fundamentals I just put out!!! At N95 (April 5 price) the share price is only 12x its current earnings per share and with the planned bonus and dividend payments people who buy now will cherish the stock. Unfortunately though, only about 476million of their shares is outstanding making it seem illiquid. Out of its average N45billion market cap, only N872million of it was traded in the last month in terms of value.
Nevertheless, if I had the cash, I’d be on the sidelines waiting to buy….NOW!!
*NOTE: I WILL BE REVIEWING THE COMPANY RESULTS MORE OFTEN IN THE COMING WEEKS AS THEIR ANNUAL REPORTS ARE PUBLISHED AND 2012 FIRST & SECOND QUARTER RESULT IS ANNOUNCED