Okomu Oil Palm heads for big turnaround in 2014

The Okomu Oil Palm is on the recovery train this year and a major lift in profit performance can be expected at the end of 2014. The oil palm and rubber producer had lost profit in the preceding two years but is now headed for a rebound at the second quarter growth rate. Dr. Graham Hefer, the company’s managing director/chief executive officer isn’t expecting to grow sales revenue this year. He hopes to lift the bottom line by cutting cost and raising profit margin.

The company, which plans to double its rubber production capacity by 2015, has been losing sales revenue in the past two years but the downward trend may end in the current year with a flat growth. Two developments have provided the strength to grow profit in a constrained revenue situation. One is the absence of loss on changes in fair value of non-current biological assets, which claimed almost the entire operating profit in 2013. The other is a sharp drop in cost of sales, which has lifted profit margin.

The company grew pre-tax profit by 21.1% to N1.73 billion year-on-year at the end of the second quarter. This is an accelerated growth from a pre-tax profit figure of about N680 million at the end of the first quarter. The improved profit performance in the second quarter equally follows accelerated growth in sales revenue.

The company’s full year profit outlook has improved further with the second quarter report. Based on the second quarter growth rate, adjusted for a usual slow down in the second half of the year, after tax profit is projected at N2.40 billion for Okomu Oil Palm at the end of 2014. This will be to multiply the company’s full year net profit of N425 million in 2013 by more than five and half times. Earnings projection for the company needs to be read with caution as it is subject to wide fluctuations arising from the nature of the business.

Hefer has succeeded in cutting down a major cost in the second quarter and has raised profit margin from the corresponding period last year. He faces the challenge nevertheless of sustaining the high profit growth rate to full year.

The company has suffered profit drops for the past two years just as sales revenue has equally been declining since 2012. Its peak profit is the N10.52 billion posted in 2011. The high profit levels of 2011 and 2012 were built largely from windfall gains in the net fair value of non-current biological assets. So far, neither gains nor losses in the value of those assets are affecting profit but an eventual appearance in the accounts cannot be ruled out at year end.

Sales revenue amounted to N4.87 billion at the end of the second quarter, virtually unchanged from the corresponding figure last year. Full year sales revenue is expected to come to N8.9 billion for Okomu Oil in 2014. This means a flat growth in turnover is expected, which is better than the loss of 12.7% in sales revenue in 2013. Sales revenue dropped from the 2011 peak of N11.12 billion to N10.15 billion in 2012 and further to N8.86 billion in 2013. While sales revenue isn’t expected to grow this year, the end of the downward slide is anticipated.

The reading of the company’s profit margin is indicating strength as well as weakness. Strength is indicated by the gain in profit margin from 19.7% in the second quarter of last year to 29% at the end of June this year. Weakness is equally indicated by a decline in profit margin from 37.1% in the first quarter to 29% in the second quarter. The drop is explained by the fact that profit failed to grow as rapidly as revenue from the first quarter levels.

The gain in profit margin on year-on-year basis follows major cost saving from cost of goods sold, which fell by 37% to N1.52 billion during the period. This led to a rise of 38.2% in gross profit to N3.35 billion. Gross profit margin rose from 50.2% to about 69% over the review period. The cost saving here was supported by a drop of over 91% in distribution/marketing expenses but partly claimed by a 58% jump in administrative expenses. A good part of the savings still flowed down to the bottom line and accounted for the 48% advance in net profit at the end of the second quarter.

Major changes in the balance sheet from the last year’s closing position include a resort to short-term borrowing in the face of cash flow constraints. Against nil position at the end of last year, short-term borrowings stood at N1.86 billion at the end of June. Long-term debts declined slightly at 7.9% to N1.17 billion over the same period. Inventories are up by 26.3% to N1.67 billion and trade and other receivables advanced by 183.5% to N3.82 billion. Cash and bank balances fell by 97% to N78 million and trade and other payables rose by 70% to N543 million during the first six months of the year.

The changes in the balance sheet resulted in cash flow difficulties for the company. Net cash from operating activities was negative to the tune of N142 million against a net cash generation of N2.87 billion in the prior period. Despite significant reductions in investing and financing activities, the company closed the second quarter with a net cash decrease of N2.55 billion. Previous cash balances have now been more than fully used up, indicating that the debt profile may rise unless the company cuts down its receivables.

The company earned N1.48 per share at the end of the second quarter, up from N1.0 in the corresponding period last year. Full year outlook indicates earnings per share in the region of N2.51 for Okomu Oil Palm in 2014. The company earned 44 kobo in the 2013 full year.

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