After three years of revenue growth, supported by higher CPO (Crude Palm Oil) prices at the international market, OKOMUOIL posted a marginal decline in revenue (-0.02%), settling at NGN20.26bn at the end of 2018. The decline in CPO prices was fueled by higher production in major producing countries, US-China trade war and oil palm protectionist policies in India. The company increased CPO production by 8% as 751ha of oil palm plantation came onboard. In 2019, we expect production to expand by 10.21% as management indicated that efficiency gains from the newly fitted sterilizers in the oil mill has increased extraction rate from c.22.00% in 2018 to c.23.00%.
In 2018, OKOMUOIL witnessed a 3.24% increase in operating expenses, due majorly to
logistics challenges created by the Apapa ports gridlock, depressing operating profits
by 8.20% to NGN6.62bn. Ultimately, the PBT and PAT declined by 7.21% and 8.72%,
reaching NGN10.33bn and NGN8.50bn respectively. The operating and finance
expenses of the firm are expected to increase by 1.12% and 39.85% respectively as
operational and financial liabilities build up.
We project that revenues will increase by 1% to reach NGN20.46bn at the end of 2019 driven by increased production. This is expected to offset the slightly lower CPO price expectation. PAT is expected to rise by 1.62%, on the back of 2019 effective tax rates
of c.10%, settling at NGN8.19bn but with a lower net margin of 40.03%, compared to
41.97% in 2018.
Financial Prudence Sustains Profitability
Despite the expansion plans being implemented by OKOMUOIL, the company has remained prudent in its finances and operations. The leverage position of OKOMUOIL remained strong as the debt-asset, debt-equity and interest coverage ratios settled at 0.07x, 0.10x and 23.04x respectively. Liquidity measures also remained strong as the
current and cash ratios settled at 1.83x and 0.84x respectively, above the industry averages of 1.41x and 0.36x respectively. More importantly, the prudence witnessed in
the leverage and liquidity positions of OKOMUOIL has continued to sustain its
profitability. We foresee a continued emphasis on efficiency as the company pursues
expansion in order to sustain profitability.
Expansion Program Hits High Note
Following the 2016-2022 expansion program, OKOMUOIL increased PPE and biological
assets by 35.98% and 216.57% respectively. At the end of 2018, OKOMUOIL completed
the cultivation of 9,800ha oil palm on its Extension 2 and is awaiting arrival and
installation of two 30 t/hr oil mills. Output from the expansion is expected to begin in
Q1:2020, ramping up to c.75,000 tonnes in 2023. We anticipate a successful expansion
with prospects of increasing the competitive advantage of the company.
Valuation and Ratings: Using a target PE of 8.32x and expected EPS of NGN9.06, we
arrived at a target price (TP) of NGN75.38 by December 2019, from an earlier TP of
NGN96.61. This represents a downside of 5.81% from the closing price on April 18,
hence, we place a HOLD rating on the stock.
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Investment Banking/Meristem Capital Limited
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