- Okomu Oil Palm Company (Okomu) reported (4 August) Sales of N4.9bn (US$29.5m) for H1 2014, representing a marginal 0.8% y/y increase, but in-line with our expectations. Our outlook for Sales growth in H2 remains tepid on the back of softening Crude Palm Oil (CPO) prices, which is falling again after a rally in H1 2014.
- Nevertheless, the company appears to be reaping the benefits of its ongoing cost curtailment program as EBIT was up by 22% y/y in H1 on the back of a significant reduction in both Cost of Sales (-37% y/y) and Selling and Distribution Expenses (-91% y/y).
- We maintain a Buy rating on the stock and a price target of N41.5/s, which is 20.3% above market price of N34.5/s. Our price target is derived using a 75%:25% combination of discounted cash flow and comparable spot multiple valuation methodologies.
- While we believe that Sales in Okomu’s palm oil division (c.63% of Sales) improved slightly in H1 (helped by a 6.9% y/y average increase in the international price of CPO), we are of the view that Sales in the rubber division (c.37% of Sales) weakened in the period. According to figures from the IMF, the average rubber price declined by 28% y/y in H1 2014.
- After two consecutive years of decline, the international price of CPO began to recover at the start of the year, but has fallen back again since May (see price chart on page 2). In Nigeria, a parallel market for CPO tends to thrive when the international price of CPO is low, putting Okomu at the risk of intensified competition going forward.
- Notably, Sales grew by 66.1% q/q in Q2. We attribute this growth to seasonality in Sales in the palm oil division (see chart below) as Q2 coincides with the end of peak production season (January – April) of palm oil. Furthermore, Okomu’s H1 2014 balance sheet showed that Net Inventory declined by 20.8% q/q from Q1 to N1.7bn as at the end of H1. This suggests that additional demand during Q2 may have been met by unsold inventory from Q1.
- EBIT was up by 22% y/y in H1 on the back of a significant reduction in both Cost of Sales (-37% y/y) and Selling and Distribution Expenses (-91% y/y). With regards to cost management, Okomu is targeting a reduction in its energy costs (see CSL: Okomu Oil, Value in store, 20 June 2014). These cost savings were partially responsible for the increase in PBT margins to 36% in H1 2014 from 30% in H1 2013, in our view.  
- Okomu reported EPS of N1.48 in H1 2014, representing 48% y/y growth over H1 2013. At the current run rate, the EPS figures are tracking our FY2014e EPS estimates of N2.99.
This post was culled from CSL Stockbrokers Research
