The nine-month financial performance of Okomu Oil Palm Plc , which was impacted by high operating and financing costs may indicate poor harvest at the end of the year, writes Goddy Egene Shareholders of Okomu Oil Palm , a company listed in the agriculture sector of the Nigerian Stock Exchange (NSE) enjoyed a bounteous harvest in 2012. Although the company has the best record of rewarding shareholders in that sector, 2012 was exceptional. That year, apart from a dividend of N7 per share, shareholders also received a bonus of one new share for every share already held. The 2012 dividend, which is the highest in the history of the company, was 40 per cent higher than the N5 paid for the 2011 financial year. Given the high interest the results generated among investors, the share price of Okomu rose to a record high of N107 in May. Instantly, investors who bought the shares at the beginning of the year at N42.50, realised a capital gain of 151 per cent. However, after adjustment for the dividend and bonus share, Okomu shares declined to around N50. Rather than begin another upward movement, the shares have been witnessing a further decline. It has been fluctuating between N44 and N43 until the company announced its nine months ended September 30, 2013 recently, showing a slump of 574 per cent in profit after tax (PAT).The negative reactions to the poor results depressed the share price to N42.50, the price at which it opened the year. History of Okomu Oil Okomu Oil Palm, which is into palm oil and rubber production, was established in 1976 as a Federal Government pilot project aimed at rehabilitating oil palm production in Nigeria . At inception, the pilot project covered a surveyed area of 15,580 hectares out of which 12,500 hectares could be planted with oil palm. It was later incorporated on December 3, 1979 as a limited liability company. However, in 1990, the Technical Committee on Privatisation and Commercialisation (TCPC) privatised the company on behalf of the federal government of Nigeria . It has since grown to become one of Nigeria's leading oil palm company with 8,800 hectares of mature palm, a young extension of 4,000 hectares per annum of rubber, and a palm oil mill of 30 tons per hour capacity. Today, the company has Socfinaf SA of Luxemburg as the main shareholder and technical partner controlling 53.32 per cent of the Okomu Oil Palm . Socfinaf has holding companies with direct and indirect interests in rubber and palm oil production plantations. The company holds stakes in plantations in Liberia , Nigeria , Ivory Coast , Cameroon , Democratic Republic of Congo and Kenya , as well as in Indonesia and Cambodia . The company's two divisions are: rubber tree activities and palm tree activities. SOCFINAF brings into Okomu Oil Palm Plc a little under a century of sound acclaimed technical expertise in the world stage. SOCFINAF ( Luxemburg ), is a global player in the cultivation of oil palm, rubber, coffee and tropical flower. Expansion Plan The Chairman of Okomu Oil Palm Gbenga Oyebode, last June told shareholders at the 33rd annual general meeting in Abuja the company would build the biggest oil mill in Africa as part of strategies to strengthen its leadership position in the oil palm and rubber industries on the continent. He said the expansion of its oil mill, which will double its production capacity thereby making it the largest oil mill in Africa , had already commenced and would be completed before the end of 2014. Oyebode explained that the expansion programme would greatly boost yield from its oil palm and rubber plantations and grow the revenue of the company. The programme includes the planting of a total of 600 hectares of rubber in 2013 and another 700 hectares in 2014. Nine Months Results While the shareholders are looking forward to reaping the fruits of that expansion in the future, the nine months performance of the company is giving them cause to worry as PAT dipped by over 500 per cent. According to the unaudited results, Okomu's revenue fell by 14 per cent to N6.788 billion, from N7.957 billion in the corresponding period of 2012. However, high administration and finance charges depressed the company's profit to N1.612 billion, compared with N3.784 billion in 2012. Although the company's gross profit fell by 33 per cent from N5.477 billion to N3.657 billion in 2013, administrative expenses rose by 26 per cent from N1.761 billion to N2.222 billion, while financing cost soared by 862 per cent from N10.629 million to N102 million. Consequently, profit before tax dipped by 574 per cent from N3.784 billion to N1.612 billion. Analysts' Assessment Analysing the performance of the company, analysts at Dunn Loren Merrifield(DLM) an investment services firm, said increase in input costs weakens Okomu's gross profit. According to the analysts, contrary to their expectation, the company's cost of sales of N3.13billion is 26.3 per cent higher than N2.48billion recorded in the corresponding period of 2012, when sales revenue declined by 14.7 per cent. This resulted in a fall in gross profit by 33.2 per cent to N3.66billion relative to N5.48 billion recorded in 2012, hence a decrease in gross profit margin to 53.9 per cent against 68.9 per cent in 2012. Therefore, COS/revenue ratio stood at 46.1 per cent in the nine months to September 2013 compared with 31.2 per cent in 2012, they said. The analysts added that similarly, operating expenses (opex) moved up by 24.7 per cent to N2.37billion in the period compared with N1.90billion in 2012. The movement in the operating expenses(opex) was driven by a 26.2 per cent y/y increase in administrative expense to N2.22billion against N1.76 billion in 2012, while distribution cost increased marginally by 5.1 per cent y/y to N145 million. Therefore, opex/revenue ratio moved up to 34.9 per cent in the review period from 23.9 per cent in the preceding year. Overall, total cost moved up by 25.6 per cent y/y to N5.50billion from N4.38billion in 2012. This resulted in total cost/revenue ratio of 81 per cent relative to 55 per cent in the same period of 2012. Consequently, operating profit declined by 54.8 per cent to N1.69billion against N3.74billion in 2012, they said. Commenting on the interest expense of the company that increased by 827 per cent to N102 million from N11 million in 2012, they said it resulted from the N1.77billion agricultural loan agreement the company incurred during the review period. Despite the decline in profit, the analysts put a target price of N47.62 on Okomu shares and recommend it to investors to buy it. According to them, in arriving at the target price, they employed multiples of price-to-earnings, price-to-sales and price-to-book, and Enterprise value -to-sales and DDM valuation methodology. Consequently, we reviewed our recommendation on the stock of the company to a BUY. Our revised valuation and estimates took into consideration the challenging operating environment in Nigeria generally, the positive policy shift towards agricultural sectors by the Federal Government by granting incentives to companies operating in the sector, and our positive outlook on the movement in the price of commodities in the global market, they said.
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