The fun enjoyed by people who ride on a rollercoaster may not exactly be the same as shareholders of Okomu Oil Palm, one of Nigeria’s leading agro-allied companies, whose earnings have followed an undulating pattern like the amusement ride within the last decade.
But there is a reason for Okomu owners to be happy even in the days of shrinking revenues and declining profits, as the company has maintained a record of consistent dividend payment since 2016. From a dividend of 10 kobo per share in 2016, the company grew dividend payment to N1.50 in 2017 and N3 in 2018.
The oil pam maker also declared an interim dividend of N2 per share when it released its earnings results for the period ended September 30 2019 on the Nigerian Stock Exchange (NSE). The dividend, which is payable on November 11, is despite a 6.8 percent dip in revenue to N15.54 billion from N16.68 billion as well as net income which fell by almost half to N4.11 billion in the first three quarters of the year.
But besides this, one line in the financial results that attracted attention was a rebound in the company’s quarterly revenue in the third quarter of 2019 after consecutive declines in the previous two quarters.
Oil palm import restrictions paid off for Okomu
A look at the third- quarter earnings figures of the oil palm maker showed that recent government restrictions on oil palm imports, including the closing of Nigeria’s borders with the Republic of Benin, were the game-changer for the company.
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Nigeria spends close to $500 million on the importation of the commodity annually, according to Central Bank’s governor Godwin Emefiele. While the importation was to meet the increasing local demands of a country once adjudged as the world’s largest exporter of oil palm in the late ’50s and ’60s, it negatively impacted the performance of local oil palm producers.
Okomu and other oil palm makers benefited from the blacklisting of some 41 items including oil palm by the Central Bank of Nigeria in 2016 when dollar shortage fostered local demand of the agro-product. But the gains were short-lived as the local oil palm producers were faced with fresh challenges – robust dollar reserves following improvements in crude oil prices, and smuggling activities across Nigeria’s porous borders.
As a result of this, Okomu Oil Palm plc witnessed a 42.5 percent decline in sales to N4.22 billion in the first quarter of 2019 from N7.34 billion, the trend was extended to the second quarter of the year with a 22.4 percent slump in revenue to N4.34 billion from N5.59 billion.
“In the first two quarters, we have a lot of problems in having to sell our products locally,” Graham Hefer, Managing Director of Okomu Oil Palm, said while reacting to the recently released results. These problems, which came as a result of illegal smuggling and imports of products are only related to rice as people may think, but also oil palm as well as other things, he said.
To curb the importation of oil palm, which was aberrantly affecting local producers, President Muhammadu Buhari in June directed CBN to blacklist any firm caught smuggling or dumping palm oil into the country from all banking businesses as well as the foreign exchange market. This pronouncement was followed up with a partial – and later graduated to complete – border closure in August and this rekindled local demands.
Hefer said after the Nigerian government shut its land borders, the impediments to sales faded off as there was a loosening of grip by illegal imports, creating an opportunity for the company to market its products more easily.
Okomu recorded N6.97 billion as revenue in the third quarter of 2019, as the company almost doubled sales compared with N3.74 billion achieved in the corresponding period of 2018. All thanks to a rebound in its domestic sales between July and September which formed the third quarter.
Local sales surged 89 percent to N5.95 billion in the third quarter from N3.14 billion a year earlier, while sales generated by exporting its products to other countries rose to N1.02 billion in the review period as against N598 million realised in the same period last year.
“In the third quarter, we sold our stock that was untapped in the last two quarters and that led to the increase in revenue,” the Okomu’s helmsman said.
In spite of this ray of hope for Okomu’s revenue trend and profitability, the sustainability of the restrictions and whether or not it would deliver a bumper revenue for the last quarter of the year enough to reverse its weakened 2018 sales which came in weaker remain major concerns. If this happens, investors’ worry over how Okomu could sustain revenue growth may be laid off.
Costs remain a concern as margins shrink took a haircut in 2018, but despite this, the company was generous enough to excite its shareholders with one-third of its profit as dividend (N2.82 billion), providing succour for its owners in a year when 17.8 percent of equity value was wiped off investors’ capital gains on the Nigerian Stock Exchange.
However, the oil palm maker’s high operating expenses which have become a bug to its margins should be a concern for any shareholder who wishes the company not only to remain on the path of profitability but also generate more profits from revenues.
For instance, the company’s net operating expenses, which factored in costs associated with operations such as inventory costs, employee benefits, marketing expenses, among others, grew by one-third to N7.39 billion between January and September 2019 from N5.63 billion. This was largely driven by about 50 percent growth in total operating expenses to N3.43 billion in the third quarter of the year from N1.46 billion.
Consequently, net profit margin, a profitability metric that measures how much profit a company generates from sales, declined to 26 percent in the first nine months of 2019 compared with 43 percent recorded in the comparative period of 2018. This means for every N100 sales realised by Okomu between January and September 2019, only N26 remained as profit which was paid out to shareholders and ploughed back to the business.
Meanwhile, the company recently told the investing public that it has intensified steps to improve collaborative arrangement with the Edo State Government in the agriculture industry through a partnership with local communities and indigenous farmers to boost job creation and enhance modern agricultural technique for an increase in production.
According to the release, the oil palm maker said it planned to cultivate 5,000 hectares for its oil palm production in the state with a determination to creating a more sustainable oil palm growth and practice.
Besides oil palm production, the principal activities of Okomu include palm kernel processing and the development of rubber plantation, while its products include palm oil, palm kernel oil, palm kernel cake, Banga (package) and rubber cup lumps.
Shares of Okomu Oil Palm remained unchanged at N54.95 per share after the close of business on the Nigerian Stock Exchange on Friday. As a result, the equity value is 36.8 percent close to its 52-week low of N40.15 per share and would deliver a dividend yield of 5.46 percent, the highest in the crop production segment of NSE’S agriculture sector.
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