Company: Okomu Oil Palm Plc (OKOMUOIL)
Current Market Price: N72
Fair Value: N85.20
By: Jeariogbe Tunde Segun (Indipendent Stock Market Analyst- Tradelines Dotbz Inv. Ltd)
Key Financial Tickers:
- The management of Okomu Oil Palm Plc have announced N3.00k final cash dividend for the year ended 31st December, 2017.
- Closure of registrar book for the said dividend is between Tuesday 15th & Friday 18th May, 2018. In other words, the qualification date for the said dividend is 14th May, 2018.
- The electronic payment of the dividend will be effected 25th June, 2018. Since the Annual General Meeting of the company is scheduled to hold on Tuesday, 12th June, 2018 at Protea Hotel, Benin City, Edo State.
- Okomu Oil Palm Plc, enjoys some sort of government backing as importation of palm oil is currently forbidden in Nigeria. Hence, the local industrial demand for its product is high.
- The global demand for Wet Cup Lump is on the increase. It can therefore be said that the company will remain in business for a longer period of time.
- The management of Okomu Oil Palm plans to plant approximately 2,000ha of pal in 2018. According to the chairman, an order has been placed for the first two 30t/hr oil mills, with ground expected to be broken on the civil works early 2018. It is expected that the first oil mill will be commissioned in 2020 and the second one, shortly thereafter.
- It has also planned to replant about 700ha of oil palm and will state the environmental impact assessment in anticipation of the planting of about 700ha of rubber from 2019.
- It is further envisaged that in k2018, the acquisition of two more tilting sterilizers will effectively create a separate 60ton/hr oil mill side by side with the original 30ton/hr oil mill and create a mega mill capable of processing around 75tons/hr in 2019.
- The Turnover figure improved by 41.05% over the similar year of 2016, it grew to N20.26 billion to N14.36 billion.
- Operating Profit grew by 60.08% from N6.951 in 2016 to N11.12 billion in the current year.
- Similarly, both Profit before and after Tax appreciated by 88.61% and 86.30% respectively.
- Although, it is generally accepted that the use of more debt to finance activities is a sure earnings booster, the management of Okomu got the investors’ side well covered as debt is only 3.12% of equity, this ratio is below the industrial average of 23.72%.
- Okomu Oil Current Ratio of 1.93x is very impressive, this is at 4.89% above the industrial average of 1.84x
- At beta value of 0.39x, the stock is less volatile, although this is typical of industrial peers (industrial average beta= 0.88).
- At Interest Coverage of 6.62x the firm holds enough muscle to push through its finance expenses. Considering the industrial average, this is typical of its industry.
- Cost of Sale Margin fairly fell below what was reported in 2016. The ratio fell by 3.50% from 25.06% in 2016 to 24.18%.
- Profit before Tax Margin grew by 33.72% over 2016 estimate, and Profit after Tax Margin rides on last year’s estimate by 32.08%.
- Both return on Average Equity and Return on Average Assets equally stood at appreciable level above 2016 figures. See below table for details.
- Generally, going by estimated efficiency ratios of Okomu Oil’s, the management could be averagely scored
- Total Asset Turnover increased by 10.19% from 58.61% to 64.59%
- For both years under comparison, the equity was not fully turned over, as can be seen in the below table, estimated ratios for 2016 and 2017 financial year were 0.84x and 0.83x respectively.
- Still testing management efficiency, we tested Equity Multiplier. It was established that Total Assets could only replicate equity in 1.28 times, this is a reduced ratio to 1.44 times of last year.
- Nevertheless, Fixed Assets turnover improved slightly by 8.89%. See below for details.
- The amount earned per unit shares of Okomu Oil improved outstandingly by 86.30% from the N5.15 earned last year to N9.59 in 2017.
- The earnings yielded 13.32% of the current market price, this is 35.87% above the 9.8% yield achieved last year. Please understand that the yield is despite the 37.12% increased in the market price of Okomu Oil within the comparable years.
- Going by the reduction in the PE/Ratio from 10.20x to 7.51x, Investors’ preference may have reduced for the shares of Okomu Oil, nevertheless, the ratio could also be interpreted as faster investment recoupment time.
- Currently, the market has priced each unit of Okomu Oil shares above its book value, judging by the Price to Book Value of 2.80x, it’s valued at almost three times over its book value.
Our valuation explored the constant perpetual growth rate model where we discounted by 11.4% using the sustainable growth rate of 15.00%, we arrived at an intrinsic value of N85.20 for each unit of Okomu Oil Palm Plc share price. In an attempt to further confirm the strength of our valuation method, we calculated the justified leading and trailing P/Es based on fundamentals using the Gordon growth model and it was confirmed that the shares of Okomu Oil is currently underpriced.
Nevertheless, considering the closeness between our TP and the current market price of Okomu at the time of this report, we recommend a Hold.
As noted above the share price of Okomu Oil do not perfectly trend, rather it enjoyed more of sideway moves, this had narrowed investment plan on the equity to either medium or long term positions.
The Bollinger Bands are narrowed and have therefore reduced opportunities for short term positions. In conclusion, we recommend the equity for both long and medium term positions.