Okomu Oil: Riding The Recession With Strong Fundamentals | Independent Newspapers Limited
Newsletter subscribe


Okomu Oil: Riding The Recession With Strong Fundamentals

Okomu Oil
Posted: Sep 26, 2016 at 4:05 am   /   by   /   comments (0)

Kirk Leigh

Lagos – Okomu Oil Palm Company appears to be on the roll as rising share price supported by strong fundamentals has earned it a ‘hold’ recommendation from analysts despite a contracting operating environment.

The share price of the company “engaged in cultivation of oil palm, processing of fresh fruit bunches into crude palm oil for resale”, among others, has delivered capital gains of eight percent this quarter beginning June from N29.70 to N38 as of Friday, September 23.

Friday’s closing price represents a 5.56 percent improvement over the previous day and 34 percent better than the amount it traded for roughly a year ago, according to Financial Times data. The stock’s beta or “measure of overall risk of volatility compared to the overall market” is 0.44, suggesting that it is less volatile than the market and could make a good addition in the portfolio of investors looking to pick defensive stocks in an economy experiencing a trough.

As of September 16, 2016, the consensus forecast amongst six polled investment analysts covering Okomu Oil Palm Company Plc advises that the company will outperform the market, according to the FT, which has a history of polling informed analysts.

“This has been the consensus forecast since the sentiment of investment analysts improved on July 26, 2016. The previous consensus forecast advised investors to hold their position in the Okomu Oil Palm Company Plc.”

According to the FT, the six analysts offering 12-month price targets for the Okomu Oil Palm Company Plc have a median target of N45.01, with a high estimate of N46.28 and a low estimate of N38.40. The median estimate represents an 18.45 percent increase from the last price of 38.00, FT notes. The estimates are an indication of the direction the company’s share prices are likely to go.

The company’s fundamentals as seen in the half year results ending June corroborate analysts’ opinion of its upward looking potential as top line and bottom-line show improvement. Turnover grew 51.2 percent to N7.55 billion from N4.99 billion with local consumption accounting for 90 percent of sales.

This could be an early sign that the company’s revenue would surpass the N9.74 billion revenues achieved in fiscal 2015 and beat its own 2016 estimate of N12.31 billion. Another would be that the policy environment is tilting towards agriculture that could lead to reduced costs of inputs like land and labour.

A case in point is the recent 11,400 hectares of land bought in Edo State’s Ovia North East and the hordes of local, cheap labour contracted in the area.

The oil palm company managed down the cost of sales in the period by 10.4 percent to N649.61 million from N724.811 million thus growing gross profit by a handsome 61.5 percent to N6.9 billion from N4.27 billion. Even if operating expenses rose almost 50 percent, operating profit doubled in the period. Operating cost moved up from N1.92 billion to N2.86 billion and operating profit moved up to N4.04 billion from N2.35 billion.

Before paying tax, the company made an 83 percent improvement in profits compared to the equivalent half in 2015, improving PBT to N3.91 billion from N2.14 billion. This jerked up pre-tax profit margin to 51.8 percent compared to the former 43 percent. This means that the company was able to translate every N1,000 in revenue into N85 of pre-tax profit.

But the company even upped the game by translating every N1,000 of revenue to N95 in net profit by growing net profit 95.2 percent to N3.6 billion from N1.84 billion.

Besides the level of efficiency demonstrated by the company’s rising pre-tax and profit margins, it cemented it with better return on assets (RoA) and return on equity (RoE). The former jumped to 15.5 percent from 9.2 percent while the latter soared to 23.1 percent from 15.3 percent.

In the last financial year, on an annualised basis, the company had improved the above metrics to three-year highs; RoE was 14.91 while RoA was 9.94.

The strong signals coming from Okomu in the market and its fundamentals are good signs enough for investors to place their bets on the indigenous player in the Nigerian Stock Exchange (NSE).