Equity Research PZ Cussons Nigeria Okomu Oil Palm Plc Nigeria Equities Consumer Goods December 16 2013 Lower revenues, higher costs weaker profits Sales decline by c.14.7% y/y and 34.5% q/q. In the nine months to September 2013, Okomu Oil recorded a decline of 14.7% in revenue to N6.79billion compared with N7.96billion in 2012. The 9M 2013 sales revenue was higher than our estimate of N6.77billion by 0.2%. The decline in the revenue was a result of lower commodity prices in the global market, especially crude oil palm, during the review period relative to the corresponding period of 2012 (fig. 6). Between Q1 and Q3 2013, crude oil palm traded at an average price of $755.80 per metric tonne i.e. a decline of 24.9% relative to an average price of $1,005.87 per metric tonne in the same period of 2012. On a geographical basis, Okomu s sales revenue in the period comprises of 64% (N4.32billion) domestic and 36% (N2.47billion) export sales (fig. 7). In our view, the higher proportion of domestic sales mitigated the impact of price shock on the company s sales revenue in the review period as reflected in the 14.7% y/y decline in the company s revenue compared with the 24.9% y/y decline in the price of crude oil palm during the period. Moses Ojo mojo@dunnlorenmerrifield.com Price: - Current N42.50 * - Target N47.62 Recommendation: * as at Friday, December 13, 2013 Fig. 2: Stock data FYE BUY December Price Movement: YTD / 52wk +100.00%/+42.86% 52-week range 53.94-17.50 Average daily vol./val. 692,940 /N43.886mn Share Outstanding (mn) 954 Market Cap. ( m) 40,541 ($253mn) EPS, N 12mth trailing 1.75 DPS, N FY2012 7.00 FCFP, N 9mths 12 Source: Bloomberg, Company s Annual Reports, DLM Research Fig. 3: Key ratios N/A 9M 2013 9M 2012 Gross profit margin 53.89% 68.85% Net profit margin 16.84% 38.48% Equity multiplier 1.44x 1.35x Asset turnover 0.22x 0.59x On a quarterly basis, the company posted sales revenue of N1.96billion in 3Q2013, i.e. down 34.5% q/q and 5.4% y/y. Fig. 4: Valuations Increase in input costs weakens gross profit. Contrary to the expectation, the company s cost of sales (COS) of N3.13billion is 26.3% higher than N2.48billion recorded in the corresponding period of 2012, when sales revenue declined by 14.7%. This resulted in a fall in gross profit by 33.2% to N3.66billion relative to N5.48billion recorded in 2012, hence a decrease in gross profit margin to 53.9% against 68.9% in 2012. Therefore, COS/revenue ratio stood at 46.1% in the nine months to September 2013 compared with 31.2% in 2012. Similarly, operating P/Sales 4.00x 4.70x 4.27x 3.75x P/E 5.65x 22.99x 22.28x 19.33x PEG N/A N/A 7.43 1.29 EV/Sales 1.61x 4.25x 3.98x 3.61x P/B 0.79x 1.55x 1.53x 1.50x ROE 14.06% 6.74% 6.86% 7.74% ROA 11.56% 5.46% 5.46% 6.12% Div. Yield 16.47% 2.83% 3.53% 3.76% Source: Bloomberg, DLM Research Fig. 5: Okomuoil vs. NSE, 52-wk movement (rebased) expenses (opex) moved up by 24.7% to N2.37billion in the period compared with N1.90billion in 2012. Fig. 1: Quarterly results Highlights 3Q2013 2Q2013 3Q2012 Q/q Δ Y/y Δ Revenue (N mn) 1,959 2,991 1,859-34.50% 5.38% Operating profit (N mn) 214 790 817-72.91% -73.81% Profit after tax(n mn) 119 530 602-77.55% -80.23% Source: Bloomberg Please read the Important Disclosures at the end of this report.
The movement in the operating expenses was driven by a 26.2% y/y increase in administrative expense to N2.22billion against N1.76billion in 2012, while distribution cost increased marginally by 5.1% y/y to N145million. Therefore, opex/revenue ratio moved up to 34.9% in the review period from 23.9% in the preceding year. Overall, total cost moved up by 25.6% y/y to N5.50billion from N4.38billion in 2012; this resulted in total cost/revenue ratio of 81.0% relative to 55.0% in the same period of 2012. Consequently, operating profit declined by 54.8% to N1.69billion against N3.74billion in 2012. Overall, total cost moved up by 25.6% y/y to N5.50billion from N4.38billion in 2012 Fig. 6: Crude oil palm price movement ($/metric tonnes) Source: Company Financials, DLM Research Fig. 7: Geographical sales revenue 9M 2013 Source: Company Financials, DLM Research PAT declines by c.63%. Furthermore, interest expense increased by 827.3% to N102million from N11million in 2012. The movement was consequent to the N1.77billion agricultural loan agreement the company incurred during the review period. Therefore, Okomu s 9M 2013 after-tax profit of N1.14billion came lower than the N3.06billion reported in 2012 by 62.7%. 2
Fig. 8: Quarterly sales revenue (N billion) Fig. 10: Quarterly COS/sales revenue ratio Fig. 9: Annual sales revenue (N billion) Fig. 11: Profit margins Our Valuation puts the revised target price of the stock of Okomu Oil Palm Plc at N47.62 per share. In arriving at the target price, we employed multiples of price-to-earnings, price-to-sales, price-to-book, and EV-to-sales. We also employed the DDM valuation methodology. Consequently, we reviewed our recommendation on the stock of the company to a BUY. 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. 3
Fig. 12: Statement of Profit or Loss, N mn Revenue 10,146 8,624 9,487 10,814 Change -15.00% 10.01% 13.99% Cost of sales 2,479 3,976 4,364 4,974 Change 60.37% 9.77% 13.99% Gross profit 7,667 4,648 5,123 5,840 Change -39.37% 10.21% 13.99% Other operating income 1,014 298 358 340 Change -70.61% 20.13% -5.03% Operating expenses 4,840 2,501 2,751 3,136 Change -48.33% 10.01% 13.99% Operating profit 3,841 2,445 2,730 3,044 Change -36.33% 11.63% 11.49% Interest income 170 28 53 104 Change -83.53% 90.00% 95.00% Interest expenses 197 122 183 150 change -38.07% 50.00% -18.00% Profit before tax 3,814 2,351 2,600 2,997 change -38.35% 10.57% 15.28% Income tax expense 756 588 780 899 change -22.24% 32.69% 15.28% Profit for the year 3,058 1,764 1,820 2,098 change -42.33% 3.20% 15.28% Fig. 13: Statement of Financial Position, N mn Non-Current Assets Property, plant & equipment 4,326 5,408 6,489 7,073 Biological assets 21,009 22,270 23,383 24,085 Other non-current assets 0 0 0 0 Total non-current assets 25,335 27,677 29,872 31,158 Current Assets Inventories 974 1,191 1,251 1,226 Trade & other receivables 823 658 704 740 Cash & cash equivalents 3,923 2,773 1,479 1,154 Total Current assets 5,720 4,622 3,434 3,119 Total assets 31,055 32,299 33,306 34,277 Equity 25,530 26,147 26,536 27,108 Non-Current Liabilities Deferred taxation 2,899 3,073 3,165 3,228 Employee obligations ben 617 636 655 687 Total non-current fin. liab. 3,516 3,708 3,820 3,916 Current Liabilities Trade & other payables 683 710 739 827 Current tax liabilities 1,261 588 780 899 Dividend payable 64 1,146 1,431 1,526 Short-term borrowings 0 0 0 0 Total current liabilities 2,008 2,444 2,950 3,253 Fig. Total 13: equity Profitability and liabilities 31,054 32,300 33,306 34,276 Fig. 15: DuPont Analysis Total assets turnover 0.40x 0.33x 0.36x 0.40x Operating profit margin 37.86% 28.36% 28.77% 28.14% Equity multiplier 1.22x 1.24x 1.26x 1.26x ROCE 15.05% 9.35% 10.29% 11.23% Fig. 16: Efficiency ratios Fixed assets turnover 0.40x 0.31x 0.32x 0.35x Current assets turnover 1.77x 1.87x 2.76x 3.47x Total assets turnover 0.40x 0.33x 0.36x 0.40x Inventory turnover 2.32x 3.67x 3.57x 4.02x Receivables turnover 34.63x 54.37x 55.35x 57.63x Payables turnover 8.56x 15.11x 16.52x 16.49x Days inventory outstanding 157 99 102 91 Days collection outstanding 11 7 7 6 Days payable outstanding 43 24 22 22 Operating cycle (days) 125 82 87 75 Fig. 17: Liquidity ratios Working capital (N millions) 3,712 2,178 484-0.134 Current ratio 2.85 1.89 1.16 0.96 Quick ratio 2.36 1.40 0.74 0.58 Cash ratio 1.95 1.13 0.50 0.35 Fig. 18: Long-term solvency & stability ratios Gearing 0.00% 0.00% 0.00% 0.00% Equity multiplier 1.22x 1.24x 1.26x 1.26x Total debt-to-equity 0.22x 0.24x 0.26x 0.26x Total debt-to-assets 17.79% 19.05% 20.32% 20.91% Proprietary 82.21% 80.95% 79.67% 79.09% Interest coverage 19.50x 20.04x 14.92x 20.28x Cash coverage 26.24x 47.88x 33.83x 42.91x Fig. 19: Shareholders investment ratios EPS, N 7.53 1.85 1.91 2.20 DPS, N 7.00 1.20 1.50 1.60 Payout 93.01% 65.00% 78.63% 72.75% FCFPS, N 7.60 3.04 2.95 3.12 Source: Company s Annual Reports, DLM Research Fig. 14: Profitability & return Gross profit margin 75.57% 53.90% 54.00% 54.00% Operating profit margin 37.86% 28.36% 28.77% 28.14% Net profit margin 35.38% 20.45% 19.18% 19.40% ROCE 15.05% 9.35% 10.29% 11.23% ROE 14.06% 6.74% 6.86% 7.74% ROA 11.56% 5.46% 5.46% 6.12% Source: Company s Annual Reports, DLM Research 4
Equity research methodology employed in this report Views documented in this equity research report stem from conclusions reached through the use of multiple valuation methodologies, industry-wide knowledge, company specific information and our near to medium term expectations of industry and company performance, as well as market outlook. Our forecasts are based on a combination of top down and bottom up analysis, alongside historical trends in industry and company financials. Where appropriate, we factored in available forecasts and business direction provided by company management. This equity research report qualifies as an initiation research report on the company whose stock has been analysed, hence the level and depth of details documented herein. Further updates on this company, or its stock, or both, will be communicated to investors via brief research notes or earnings-flash emails, as occasion demands. Our recommendation is slightly biased towards value investing. Therefore, our investment rank gauge a customized scale we use to judge how well a firm under coverage has performed is determined using major value parameters as well as relevant ratios and multiples computed with figures from the company s most recent financials. The investment rank or grade given to a company is an alphabet which falls in the set {A+, A, B, C+, C, D, E, F}, where Grade A+ means the company has done excellently well on all fronts that form the basis of our consideration, and has a strongly positive performance outlook. Grade A means the company s performance is of high quality, but can be made better. Outlook for the company is positive. Grade B means the company performed marginally above average, at least relative to its peers, but faltered on some fronts. Outlook is weakly positive. Grade C+ means the company s performance is exactly average; outlook is neither positive nor negative. Grades C and D indicate that dwindling performance is the company s fate at the current time. Outlook for the company is mildly negative. Grades E and F mean the company is headed for towards jeopardy, which might impair its ability to continue as a going concern. Outlook for the company in this case is alarmingly negative. The variables used to arrive at the company s investment rank cover a wide range of measures which characterize liquidity, operational efficiency, profitability, profitability margins, growth, economic profitability, gearing, relative valuation ratios, capital structure and management performance. Our investment recommendation is underpinned by the upside or downside potential of a stock under coverage. This potential is estimated by comparing the stock s current market price to its price target and fair value, on a percentage increase or decrease basis as summarized below: Deviation from current price Recommendation >30% STRONG BUY 10% to < 30% BUY -10% to < 10% HOLD <-10% SELL Source: Company Financials, DLM Research In our analysis, we distinguish between fair value and price target. Fair value is our opinion of the actual fundamental worth of a stock, irrespective of what the market thinks of the stock or what investors are willing to pay for it. Value investors purchase stocks way below their fair values, while income investors might purchase stocks at their fair values at the very maximum. Price target, on the other hand, is the estimated price we opine the stock will trade in the near to medium term. It is the price that, if realized, could result in the best investment returns, given prevailing market conditions. It gives an idea of the price other investors might be willing to pay for a stock regardless of its actual worth. We employ fair value, price target or both to determine a stock s upside or downside potential. A BUY recommendation directly means what it says; purchase the stock according to your wallet and appetite for risk. A SELL recommendation prompts investors to exit their positions in the stock, as the analyst believes the stock is not worth investors time and capital commitment. A HOLD recommendation generally tells investors to do nothing; if you have not bought the stock, do not buy it and if you have bought it, do not sell it. 5
IMPORTANT DISCLOSURES. This research report has been prepared by the analyst(s), whose name(s) appear on the front page of this document, to provide background information about the issues which are the subject matter of this report. It is given for informational purposes only. Each analyst hereby certifies that with respect to the issues discussed herein, all the views expressed in this document are his or her own and reflect his or her personal views about any and all of such matters. These views are not necessarily held or shared by Dunn Loren Merrifield Limited or any of its affiliate companies ( DL Merrifield ). The analyst(s) views herein are expressed in good faith and every effort has been made to use reliable comprehensive information but no representation is made as to its accuracy or completeness. The opinions and information contained in this report are subject to change and neither the analysts nor DL Merrifield is under any obligation to notify you or make public any announcement with respect to such change. This report is produced independently of DL Merrifield and the recommendations (if any), forecasts, opinions, estimates, expectations and views contained herein are entirely those of the analysts. While all reasonable care has been taken to ensure that the facts stated herein are accurate and that the recommendations, forecasts, opinions, estimates, expectations and views contained herein are fair and reasonable, none of the analysts, DL Merrifield nor any of its directors, officers or employees has verified the contents hereof and accordingly, none of the analysts, DL Merrifield nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof. With the exception of information regarding DL Merrifield, reports prepared by DL Merrifield analysts are based on public information. Facts and views presented in this report have not been reviewed and may not reflect information known to professionals on other DL Merrifield business areas including investment banking. This report does not provide individually tailored investment advice. Reports are prepared without regard to individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. It is recommended that investors independently evaluate particular investments and strategies. The appropriateness of a particular investment or strategy will depend on an investor s individual circumstances or objectives. Neither the analyst(s), DL Merrifield, any of its respective directors, officers nor employees accepts any liability whatsoever for any loss howsoever arising from any use of this report or its contents or otherwise arising in connection therewith. Each analyst and/or any person connected with any analyst may have acted upon or used the information herein contained, or the research or analysis on which it is based prior to its publication date. This document may not be relied upon by any of its recipients or any other person in making investment decisions. Each research analyst certifies that no part of his or her compensation was, or will be directly or indirectly related to the specific recommendations (if any), opinions, forecasts, estimates or views in this report. Analysts compensation is based upon activities and services intended to benefit clients of DL Merrifield. As with other employees of DL Merrifield, analysts compensation is impacted by the overall profitability of DL Merrifield, which includes revenues from all business areas of DL Merrifield. DL Merrifield does and seeks to do business with companies/governments covered in its research reports including market making, trading, risk arbitrage and investment banking. As result, investors should be aware that DL Merrifield may have a conflict of interest that could affect the objectivity of this report. DUNN LOREN MERRIFIELD Elephant House 214 Broad Street, Lagos, Nigeria Tel: 234 1 462 2683-4