OKOMUOIL’s impressive Q1-22 numbers reflected the positive effects of the surge in Crude Palm Oil (CPO) price on revenue, with key lines growing substantially in the quarter. For 2022FY, given that we see no respite to the Russia/Ukraine crisis and the global CPO supply deficit – the main drivers of the higher price, we expect OKOMUOIL to deliver impressive earnings, which would outperform the level attained in 2021FY. Furthermore, we believe the (1) company’s recent CPO milling plant upgrade, (2) 5MW turbine, and (3) government support will continue to enhance OKOMUOIL’s efficiency and provide another layer of support to earnings.
Analysts at Cordros Research say “We cite cost pressures emanating from the effects of higher crude oil prices on plantation costs and the inflationary environment as key downsides. Following the revisions to our forecasts, we raise our price target to NGN213.39/s (prev.: NGN175.00/s) but downgrade our rating from “BUY” to a “HOLD”. On our estimated 2022E P/E of 10.0x, OKOMUOIL now trades at a slight discount to its MEA peer average of 9.8x and 5.6x, respectively, a development we think is reflective of the stock’s 138.9% price gain over the past twelve months.
Topline growth boosts Q1-22 earnings: OKOMUOIL’s revenue grew by 63.2% y/y in Q1-22 – the highest ever quarterly print – primarily driven by solid growth in sales – local (+66.6% y/y | 92.1% of revenue) and export (+31.8% y/y | 7.9% of revenue). We attribute the growth in revenue to the surge in CPO price (Average CIF Rotterdam CPO price: USD1,569.18/mt in Q1-22 vs USD1,087.18/mt in Q1-21) influenced by the Russia/Ukraine crisis and sustained supply issues (lower supply from Indonesia and Malaysia who jointly account for 85% of global supply) in the international market. However, gross margins (-10.31ppts to 85.9%) compressed due to cost pressures from higher costs for fertilizers, a fallout of higher crude oil prices. Notwithstanding, the operating margin (+11.18ppts to 66.9%) was higher following a decline in OPEX (-23.4% y/y), thus, EPS came in higher at NGN9.96 (Q1-21: NGN5.53).
Continuing, Cordros Research analysts remained optimistic for 2022FY, saying “For 2022E, we expect another significant growth in OKOMUOIL’s revenue, driven solely by the surge in CPO prices, as we do not envisage a significant expansion in volumes from current levels. As such, we forecast revenue growth of 67.0% in 2022E and model an average annual revenue growth of 7.3% over 2022E-2023E.
“We expect cost pressures to persist as a result of higher fertilizer costs owing to the surge in crude oil prices. However, we envisage a limited pass-through impact on margins, given our expectations of elevated CPO prices. Thus, we estimate gross margin will decline marginally by 50bps to 81.7% in 2022E. We model a 9.09ppts increase in EBIT margin to 53.5%, driven by the strong growth in topline and a 214bps reduction in OPEX-to-sales ratio to 9.0%. Consequently, we forecast a 91.9% y/y increase in EPS to NGN23.22 in 2022E (+292.2% y/y in 2021FY). Further out, we forecast an EPS CAGR of 3.1% in 2023E-2026E. We note that our 2022E EPS tracks ahead of Bloomberg’s consensus estimate of NGN17.00 by 36.6%.
Valuation: The net impact of our changes is an upward adjustment in our price target to NGN213.39/s (previously: NGN175.00/s), implying a 0.7% downside and a total return of 6.4% after factoring dividend yield of 7.1%. Thus, we downgrade the stock from “BUY” to a “HOLD”. On our estimates, OKOMUOIL trades at a 2022E P/E and EV/EBITDA of 9.3x and 5.4x, a slight discount to the MEA peer average of 9.8x and 5.6x, respectively.
