A worker holds harvested oil palm fruit for a photograph at a plantation and production factory in Kertajaya, Banten Province, Indonesia. Photographer: Dadang Tri/Bloomberg

After nine months in 2018, OKOMU Oil Palm PLC has reported a 13.3% y/y growth in earnings, buoyed by sharp decline in COGS amidst relatively flat revenue and lower effective tax rate.
Analysts from Codros Capital Nigeria have revised their earlier revenue estimate for 2018E slight lower to NGN20.86 billion (from NGN21.1 billion) to reflect weaker performance in Q3. To add, they cut their FY-18 projection for input cost to NGN3.19 billion (from NGN3.58 billion) which should neuter weaker topline amidst continued gains from lower finance charges. Bringing it all together, they now expect earnings to climb 4.5% to NGN9.6 billion.
According to them, weaker commodity prices underpin lower topline: For the rest of the year and they expect revenue to be slightly weakened by sustained moderation in commodity prices. Pertinently, lower global rubber prices led to lower rubber sale in Q3-18, and given OKOMU exports all its rubber production, pressured global rubber prices (-30.1% YTD to USD1.28/kg) will continue to drive benign rubber sale.
Thus, whilst they maintain their FY-18 projection for CPO sales at NGN17.95 billion, they revise revenue projection for rubber to NGN2.91 billion (previously: NGN3.14 billion), reflecting the (1) weak volume and price performance in Q3-18and (2) persisting supply glut, amidst weaker demand from China and brewing global trade concerns.
Elsewhere, they expect that the management’s tight lid on input cost will continue to buoy gross margin which should largely offset rising operating expenses. Therefore, to reflect lower-than-expected COGS, together with faster rise in operating cost in Q3-18, they revise their input cost lower by 11% to NGN3.19 billion (prior forecast: NGN3.58 billion) and operating cost higher by 6.7% NGN6.57 billion (prior forecast: NGN6.16 billion).
They highlight that higher operating cost continues to reflect the start-up operations at Extension II. The combined impact of the foregoing will lead to 2% y/y increase in EBIT to NGN11.3 billion.
In their valuation, with strong earnings growth in Q1, Okomu stock has rallied 17.9% YTD, outperforming the broader market’s 13.8% loss. The stock trades at current P/E of 7.6x relative to 49.7x for Bloomberg peer average which is at a stack discount.
On current market price of NGN79.80, their revised TP implies an upside of 14.75%, and expected total return of 19% after incorporating our 2018E dividend yield of 4.4%. They maintain their HOLD recommendation on the stock.

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