Even as the world scurries to find shelter from the storm, Okomu Oil stays unscathed as it records a 65.5% jump in revenue and 101.4% jump in Profit After Tax. Its performance is boosted by local sales, reduced cost of sales governed by optimized operations, as well as its decision not to pay dividends in the period just disclosed
If there is anyone business analysis tool to aid investors in choosing stocks that are head-above-water most of the time, it is “MoSCoW” – a prioritization system depicting the ranking of consumer spending particularly with the existence of constraints. Representing ‘Must,’ ‘Should,’ ‘Could,’ and ‘Would,’ the idea is that when the chips are down, consumers will spend on “Must-haves” as opposed to “Could haves” or “Should have.” With the pandemic on our tails, one of the lessons many businesses and individuals have learnt is that certain things are more important than others; people will naturally channel their limited resources to their most essential needs. Even with the international market on a COVID-19-induced hiatus, OKOMUOIL’s Q1 2020 results performed exceptionally well, proving that its products are nothing short of essential.
With the growth in revenue of 65.2% in Q1 2020, the company recorded a turnover of ₦6.9 billion in comparison to the ₦4.2 billion it made in Q1 2019. It also recorded a profit after tax of over ₦2 billion in comparison to the ₦1 billion recorded in Q1 2019 – a jump of 101.4%. What is most exciting is that the producers of the sought after Banga Palm Oil & Quality Noko 10 Rubber brands attained this feat from a YoY increase in local sales, almost doubling at a growth rate of 81.6%, thereby masking the weakness in export revenue – a decline of ₦89.8 million in Q1 2020 from its 2019 figures (-12.5% YoY).
Its export revenue is derived from rubber which is shipped out of the nation’s borders. The disclosed numbers suggest improvement in the company’s margins as well as heightened cash flow generation which could be as a result of the increased domestic demand from ongoing border closures. The growth in revenue also reflects the harvesting of matured portions from previous years’ planting.
The gain was further buttressed by the equally massive drop in the company’s cost of sales from the ₦838 million it incurred at the end of Q1 2019 to ₦252 million in 2020 – The decrease of 70% possibly attributable to optimized operations or the diminishing operational costs over time, typical of the agro-industry. There could, however, have been some reclassification between the cost of sales and other operating expense that will be revealed in coming quarters.
With an increase in interest on long term loans of ₦113.5 million from ₦72.6 million in Q1 2019 to ₦186 million in Q1 2020, it is also clear that the additional capital obtained over the period contributed to its improved performance. The company also did not pay dividends in Q1 2020, clearly opting for a growth strategy of profit reinvestment. Finally, cash generated from operations surged to ₦3.6 billion in Q1 2020 from ₦7.2 million in Q1’19 as a result of the surge in cash receipt from customers of 129.3% YoY.
The OECD-FAO Agricultural Outlook 2019-2028 foresees that the demand for agricultural products will grow by 15% over the coming decade. However, the Global Palm Oil industry has been witnessing unprecedented growth. The Global Palm Oil Market: Insights, Trends and Forecast (2020-2024) report by Research and Markets revealed that the global palm oil production volume is expected to reach 98.82 million metric tons in 2024, growing at a CAGR of 5.9%, for the period spanning from 2019 to 2024. Agriculture companies such as OKOMUOIL are likely to be supported by devaluation impact and a larger market share due to border closures.
The company, thus, presents a buying opportunity based on its strong fundamentals and growth trajectory. Its share price as of today, May 5th 2020, before the markets opened was ₦55.05, which is about the midpoint of its 52-week range of ₦40.15 to ₦77. With a price-to-book ratio of 1.7643, the current price might be slightly overvalued.
However, with a dividend yield of 3.57% and earnings per share of 6.85% in the same period, Okomu Oil is set to grow at a good pace.