FBN Quest rates Okomu Oil stocks high

FB Quest research has given the thumbs up for Okomu Oil stocks considering the second quarter financial results of the company which came in stronger than was expected mainly because of a positive surprise on the gross margin line.

Consequently, analysts have increased our earnings estimate over the 2017-18 period by 10 per cent on average and our price target by 27 per cent to N72.4.

The increase to the price target is much higher because than FBN Quest rolled over. “Okomu shares have returned 81 per cent this year and are trading on a 2017E P/E multiple of 8.0x for EPS growth of five per cent y/y in 2018E.

From current levels, the shares are trading close to our fair value estimate of N72.4, such, analysts at FBN Quest retained its Neutral rating on the stock.

Okomu’s Q2 2017 results showed that sales grew by 56 per cent y/y to N6.6 billion. PBT and PAT of N4.4 billion and N3.2 billion advanced by 94 per cent y/y and 58 per cent y/y respectively. Although net interest costs and operating expenses increased by 50 per cent y/y and 16 per cent y/y respectively, these were not strong enough to offset the strong sales growth and a 250bp y/y gross margin expansion to 99.7 per cent, leading to the PBT growth.

The PAT growth was slower due to a higher tax rate of 28 per cent compared with 12 per cent in Q2 2016. On a sequential basis, sales grew by 12 per cent q/q, which we attribute to seasonality.

The end-Jun quarter is usually the strongest quarter for the palm oil companies. Due to the q/q sales growth and a 2,109bp q/q gross margin expansion, PBT advanced by 30 per cent q/q, despite a 64 per cent q/q increase in operating expenses. PAT growth slowed to 3 per cent q/q on the back of a higher tax rate (versus 10 per cent recorded in the prior quarter).

Okomu’s palm oil business recorded sales growth of 59 per cent y/y while the rubber business grew sales by 23 per cent y/y during the quarter. The rubber segment now accounts for just 8 per cent of the company’s topline (vs 40 per cent in 2011).

As such, the palm oil business remains the driver of growth. Okomu’s Q2 2017 results were ahead of our estimates mainly due to better-than-expected gross margin of 99.7 per cent.

“However, we do not believe this level will be sustained for the balance of the year due to seasonality. Okomu’s peak season is the end-March quarter and the company usually has higher maintenance costs in the off-peak seasons.

“We have forecasted gross margin of around 80% for the full year and we see sales and PBT growing by 54% y/y and 97% y/y respectively,” Analyst said.