Okomu Oil Palm Company Plc: Increased activity within core business areas crucial to company’s performance

Okomu Oil Palm Company PLC is a legally registered company in Nigeria and is active in the rubber and oil palm plantation industry. In 1976, the Nigerian government launched a programme for the creation of huge industrial palm plantations. It also created the Okomu plantation in the same year in response to the country’s vegetable oil deficit, and Socfin was asked to take on the running of the Okomu Oil Palm Company. The privatisation of the plantations implemented in 1990 encouraged the Socfin Group to acquire a majority stake in Okomu. In 1998, crop diversification led to the introduction of rubber cultivation. In 2014, Okomu pursued its growth further by doubling the processing capacity of its oil mill and continuing to replant its oldest palm groves and rubber trees in order to improve productivity.

GROWTH IN REVENUE ON THE BACK OF CORE BUSINESSES

Okomu Oil’s revenue shows an extensive growth as it increased by 65.33% to N12.47 billion in June 2017 from N7.55 billion in June 2017 as a result of increase of 65.36% in local sales over the period to its wide range of distributors and customers and export sales rose by 64.09%. Local sales of Okomu products form 89.73% of total sales. This depicts the high consumption locally and a potential to generate better revenue with increased production to meet exportation needs. Cost of sales grew notably to N1.29 billion from N649 million over the period; representing a substantial growth of 98.08%. The increment rose from the combined effect of rises in various components of operational expenditures especially: raw materials. Oil palm and rubber rose by 98.11% and 97.78% respectively, which we believe shows partly the inflation position caused by prevailing macro-economic headwind in the economy. Expectedly, gross profit grew by 62.25% to N11.19 billion in the half-year 2017 from N6.90 billion reported a year earlier.

PROFITABILITY INCREASES BOOSTED BY FINANCIAL INCOME

Management of expenditures by the Company resulted in growth to N3.26m in the six-month ended, June 2017 from N2.86 billion in the corresponding period of 2016; hence indicating an increase of 13.90%. The operating expenses include administrative expenses and distribution expenses. Also, financial income rose on the back of increased interest on deposit by a massive 821.78% in interest on deposit. On the other hand, financial cost on the back of foreign exchange fluctuations increased to N366m which represents 117.08% increment when compared with June 2016 figure of N168m. Okomu Oil Palm Company Plc recorded a significant growth of 100% in profit before tax to N7.81 billion in the half- year ended, June 2017 over N3.91 billion reported in the corresponding period of 2016. Hence, income tax grew to N1.58 billion from June 2016 figure of N314m, thereby leading to a record of 73.63% growth in profit after tax to N6.24 billion from N3.59 billion which was reported in June 2016.

KEY FINANCIAL RATIOS REFLECTS IMPROVED PERFORMANCE

The Company’s balance sheet shows positive changes in total assets, net assets and total liabilities which grew by 24.42%, 28.24% and 15.74% respectively as at half-year ended, June 2017, when compared to half-year ended, June 2016. Total asset currently positions at N30.49 billion while total liabilities stood at N8.68 billion; and N21.82 billion marks shareholders’ value. Moreover, with respect to returns, the company’s return on average equity (ROAE) improved to 32.12% while return on average assets (ROAA) stood at 22.67% as at June 2017. The Company’s liquidity ratio - current ratio – improved to 2.33x from 2.23x as at December 2016. Okomu’s management shows effectiveness in its operation with a profitability margin of 49.98%.

DESPITE THE OPPORTUNITIES, THE VALUE CHAIN IS YET TO BE FULLY OPTIMISED

Findings reveal that the country imports 42% of palm oil needed for consumption annually despite the country’s abundant endowment of the natural resources required for palm oil production. The country consumes about 2m metric tonnes per annum as palm oil products serve as primary raw material for many companies. The industry is yet to fully take advantage of the presence of a huge market for its outputs both in and out of Africa. Although, with Nigeria being is the highest producer of palm oil in Africa there is still a vast opportunity to meet demand around the globe. This we believe is a huge potential for Okomu Oil Palm Company Plc.

WE RECOMMEND A BUY

In line with our review of Okomu’s current operations, we believe that the Company has the capacity continue to boost its performance with increased activity within its business areas in an industry with high growth potential. We therefore forecast using a combination of the adjusted price to earnings multiple (P/E) valuation model, a weighted 6-month target price of N74.54, which represents a 26.07% upside on the current stock price. We place a BUY recommendation on the shares of Okomu Oil Palm Company Plc.

IN LINE WITH OUR REVIEW OF OKOMU’S CURRENT OPERATIONS, WE BELIEVE THAT THE COMPANY HAS THE CAPACITY CONTINUE TO BOOST ITS PERFORMANCE WITH INCREASED ACTIVITY WITHIN ITS BUSINESS AREAS IN AN INDUSTRY WITH HIGH GROWTH POTENTIA