Okomu Oil Palm may reverse sliding profit

The Okomu Oil Palm Company has seen three years of sustained profit run down but the oil palm and rubber producing company looks likely to reverse the downslide this year. Over the past three years, the company reported a steady drop from its peak profit figure of N10.52 billion in 2011 to N1.55 billion at the end of 2014.

The company has finished its two critical earning quarters for the year at the end of the first half of the year with flat revenue but with a gain in profit margin. At the end of the second quarter, profit was already well above the full year figure in the preceding year. A sharp slowdown is expected in the second half, which is the company’s off production season. Growth is however expected to be strong enough to reverse the three-year drop in profit at the end of the year.

The company generated a turnover of N4.99 billion at the end of the second quarter, which is a marginal improvement of 2.5% year-on-year. Revenue growth is expected to remain marginal at full year, as growth is expected to slow down in the second half of the year. The critical production season for oil palm products is the first half of the year.

Stability in earnings can be expected when rubber production begins to contribute an increased share of turnover. Dr. Graham Hefer, the company’s managing director/chief executive officer hopes to double rubber production capacity this year. Based on the slowdown expected in the second half of the year, the company’s turnover is projected at N9.07 billion at the end of 2015. This will still be a flat growth of 2.1% over the turnover of N8.88 billion the company posted at the end of 2014. Okomu Oil Palm Company has been losing sales revenue as well for the past three years running but a mild recovery is anticipated at the end of the current year.

Against the flat revenue situation, the company raised after tax profit by 30.3% year-on-year to N1.84 billion at the end of June. That is already well above the full year after tax profit of N1.55 billion the company reported at the end of the 2014 financial year. Profit growth is not expected to remain that strong in the second half of the year. After tax profit is projected at N1.94 billion for the company at full year. That would be an increase of 25.2% over the full year profit figure in 2014.

The company has lost profit every year since 2012 at a galloping speed from its peak profit figure of N10.52 billion in 2011. The downward trend is expected to be reversed this year with the strong growth recorded at the end of the second quarter. The high profit levels of 2011 and 2012 were built largely from windfall gains in the net fair value of non-current biological assets. Conversely, loss on changes in fair value of non-current biological assets, claimed almost the entire operating profit in 2013.

Earnings growth is uneven for the company and actual profit is subject to a wide deviation from the anticipated. There have been instances when the company posted lower profits at full year than it reported at the end of the third quarter. This is due to the unpredictable influence of weather conditions on product yield.

The strength to grow profit from flat revenue so far this year came from a drop in operating cost. A drop of 20.7% in operating expenses more than countered a rise of 25.4% in cost of sales and raised operating profit by the same margin. Interest income more than doubled by 118.8% to N35 million and interest expenses rose by 54.4% to N244 million during the same period. The company’s long-term borrowings rose by 68.4% to N3.16 billion over the six months of the year.

Net profit margin has improved from 29% in the same period last year to 36.9% at the end of June. This is more than twice the net profit margin of 17.9% the company recorded at the end of 2014. It is also higher than any time in the past three years.

Earnings per share rose from N1.48 at the end of the second quarter of last year to N1.93 at the end of June this year. The company is expected to earn N2.03 per share at full year, improving from N1.62 at the end of 2014. The company is regular on dividend payment though there was a sharp drop from N1.0 per share paid for 2013 operations to 25 kobo for 2014.