Okomo Oil, Nigeria’s biggest producer of crude palm oil and the second-biggest producer of rubber recently released its Q1 2022 three-month report, which shows it recorded revenue of N20.49 billion, the highest ever quarterly result by the company.
Data sourced from the NGX showed that the growth in revenue is driven by export sales due to the surge in CPO price influenced by the Russian/Ukraine crisis and sustained supply issues in the international market.
A further cursory view of the report shows that revenue grew by 63% to N20.49 billion from N12.55 billion in Q1 2021, just as profit after tax jumped by 80.2 per cent to N9.50 billion from N5.27 billion in the same period last year and thus earnings per share grew by 80 per cent to N9.96 from N5.53 in Q1 2021
However, cost of sales, which grew by 504 per cent to N2.9 billion from N479 million in Q1 2021, contracted the gross profit growth to 48 per when compared to the same period last year.
Looking at the company’s five-year performance (2017-2021), revenue grew on average by 15.39% per year just as earnings grew by 40.22 per cent per year; the latter buoyed by 292 per growth in 2021. Despite a mean yearly dividend of N3.53 billion and capital expenditure of N8.13 billion, the company’s accumulated retained earnings moved up to N41.46 billion in Q1 2022 from N32 billion in 2021.
In 2019, revenue and earnings declined by -6.86 per cent and -40.61 per cent respectively. According to the Company Chairman’s report; the decline was due to the immense surge in illegal imports of Olein into Nigeria that led to the effective log jamming of all sectors of the oil pipeline for nearly two quarters and the drop in the world market price for crude palm oil caused by US-China trade and increase in import duties by India, the world largest importer of palm oil.
The initial shock of COVID-19 on commodity supply-demand chain disruptions, drop in global palm oil price to its lowest in May 2020 and high cost of sales and operating expenses contracted the bottom line to N2.94 billion in 2020 from N5.05 billion in 2019, as earnings per share dropped to N3.08 from N5.29; the lowest in five years.
However, in 2021, the company did better relative to the 2020 financial year. According to the company’s released financial report, revenue grew by 60 per cent to N37.4 billion from N23.4 billion in 2020. Earnings grew by 292 per cent to N11.6 billion from N2.9 billion in 2020, just as earnings per share grew by 292.85% to N12.10 from N3.08 in 2020.
As a result, the company, in April 2022, announced a dividend payment of N8.00 kobo per 50 kobo ordinary share for the financial year ended December 31, 2021, bringing the total consideration for the 2021 financial year to N7.63 billion, which is 66% of the company’s profit of N11.54 billion for 2021FY. For the period ended December 2020, the company paid a total of N6.68 billion to shareholders as dividends, over twice its total profit for the period, N2.94 billion; an indication that the larger bulk of dividends paid was from the company’s retained earnings.
Compelling Investment Case?
Okomu Oil shares have gained 36.27 per cent from YtD starting the year at N135.46 and currently traded at N193.50. This means N1 million invested in January 2022 at N135.46 per share would be worth N193.50 million now; a gain of about N58 million.
Okomu has a price-to-earnings (PE) ratio (TTM) of 10.10x, which means investors pay N10.10 for each Naira of profit earned by Okomu, while Presco has a PE ratio of 7.58x. Both companies are cheaper relative to global peer. For instance, Wilmar International Ltd, one of the largest listed palm oil companies globally is slightly priced higher than Okomu and Presco at 10.15x
The upside and downside performance over the years has largely been influenced by market cyclicality; CPO demand and price fluctuations, country macroeconomic changes and policies/risks rather than production growth.
There has not been much stiff competition locally, as the leading producers hardly meet up local demand for crude palm oil. According to Joe Onyuike, the National President of Oil Palm Growers Association of Nigeria, Nigeria requires about $500 million worth of palm oil to meet local demand for the commodity. Also, data from the Nigeria Bureau of Statistics show that vegetable fats and oil (animal fats inclusive) accounted for 1.2 per cent of Nigeria’s total imports in 2022
In 2020, Okomu’s crude palm oil and kernel oil production reached 47,853 tons and 1,602 tons respectively, while kernel and kernel cake rose to 9,678 tons and 2,913.3 tons. By the end of 2021, CPO production was nearly 3 per cent higher than for the same period of 2020. However, CPO and rubber prices increased by 53% and 39% respectively, Y-o-Y.
The company boasts of a strong balance sheet; strong retained earnings, cash balances and free cash flow. Retained earnings increased by 30 per cent from N32 billion in December 2021 to N41.5 billion as at March 31, 2022, while cash and cash equivalent grew by 137 per cent to N23.6 billion from N9.96 billion in December 2021. The company’s free cash flow moved up to N10.625 billion in 2021 from N1.54 billion in 2020 and further to N13.690 in March 2022. However, the biological assets of the company as at March 31, 2022, stood at just N1 billion, which is about 1.26 per cent of the company’s total assets.
While the company’s net investing cash flow growth continues to shrink, its net financing cash flow growth continues to widen on increased dividend payout. Though the universal view in the investment community is that regular and increased dividend payout enhances share price, would it not be better to target low payout ratio, especially when there are growth opportunities?
What is paramount now is a paradigm shift to high production volume induced revenue/earnings growth rather than on high prices as the effects of the Russia-Ukraine induced tight global supplies and the recent surprise ban on oil exports by Indonesia continue to bear on the markets.