By Stanbic IBTC Stockbrokers


Action: The Okomu Oil Palm Company Plc (Okomu) released 1Q18 results reporting a 100% q/q (+25% y/y) and 26% q/q (+13% y/y) increase in revenue and earnings respectively. Oil palm sales made up 87% of 1Q revenue, up 24% y/y and 141% q/q on seasonality.

The company’s 1Q revenue tracked ahead of SBGS and Bloomberg annualised consensus estimates by 51% and 41% respectively. Similarly, reported 1Q EPS tracked ahead of SBGS and Bloomberg annualised consensus estimates by 98% and 71% respectively.

Strong top line performance driven by volumes: Our channel checks for 1Q18 showed local crude palm oil (CPO) prices declined by 11% q/q on average during the quarter, which suggests that sales were driven by a significant growth in volumes. We had previously anticipated single digit revenue decline for Okomu in FY18E, on flat volume growth and lower prices. However, given this outperformance in 1Q and our expectation of strong sales numbers in 2Q, which also falls within peak oil palm production season, we have revised our FY18E volume estimate for CPO upwards by 12%. Consequently, we forecast stronger revenue growth of 10% y/y in FY18E.

Cost pressures amid lower prices to weigh on FY18E earnings: Okomu reported operating expenses as a percentage of sales of 36% in 1Q18 versus 21% in 1Q17 (38% for FY17 and FY15), with operating expenses rising by 116% y/y. Management had earlier guided on possible cost pressures in FY18E from start-up operations at the new plantation (which largely consists of immature trees) and an increase in salaries to be staggered over FY17-19E. Given Okomu’s track record of reporting the bulk of its costs in the latter half of the year, we could potentially see a sustained uptick in operating expenses in subsequent quarters. On this basis and with softer local crude palm oil prices, we expect the oOkomu reported operating expenses as a percentage of sales of 36% in 1Q18 versus 21% in 1Q17 (38% for FY17 and FY15), with operating expenses rising by 116% y/y.perating margin to contract to 52% in FY18E from 55% in FY17, limiting earnings growth to 3% y/y in FY18E.

Upgrade to Buy on new TP of N101: We upgrade our recommendation to Buy (from Hold) with a new target price of N101 (from N76) after incorporating the better than expected revenue performance into our model. Following the quarter’s outperformance, we adjust our FY18E, FY19E and FY20E EPS estimates upwards by 35%, 18% and 17% respectively as we assume higher production volumes during the period. On our numbers, Okomu currently trades on a FY18E P/E multiple of 7.8x compared to 8.5x for Presco and 15.8x for Asian peers.

Risks: Some of the risks to our estimates include lower than forecast rubber sales, lower prices for local CPO and rubber, and lower yields or extraction rates. We also view higher than forecast expenses in FY18E as a downside risk to our numbers.

Disclaimer: This is not an investment advice or a recommendation to buy or sell. Consult your financial adviser or stockbroker

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