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The Okomu Oil Palm: an example of how to convert assets into profit - THE CITIZEN

By The Citizen

Over the past two years, the Okomu Oil Palm has lifted its net profit by more than N13 billion gains in changes in asset values. Gains on changes in fair value of non-current biological assets jerked up the company's bottom line by N7.3 billion in 2011 and further by over N5.9 billion in 2012. The gains, which are converted directly into profit, contributed up to 63% of the company's total profit figure of N20.8 billion in 2011 and 2012.

The big gains from the value of the company's assets seem to neutralise the weakening of profit performance on continuing operations. Profit on continuing operations declined by 8.5% in 2012 to N3.59 billion. Between the beginning of 2011 and the end of 2012, the value of non-current biological assets of the company had expanded by 172.1% to over N21 billion.

The oil palm producing company had surprised stock market investors and traders in 2011 when out of its turnover of N11.21 billion, it posted net profit of N10.52 billion. Apart from the N7.3 billion gain in asset value in that year, there was also a big leap in profit from continuing operations from N1.63 billion in 2010 to N3.92 billion in 2011.

The company had closed its 2011 operations with a net profit multiplied about six and half times. That gave it the position of the number one company on earnings per share basis in the entire Nigerian stock market. With earnings per share of N22 for that year, Okomu was ahead of Nestle's N21 per share for the same year.

In 2012, the big strength in sales revenue seen in 2011 could not be maintained. Against a rise of 82.6% in sales revenue in 2011, the company's turnover declined by 8.8% to N10.15 billion. Earnings fluctuation is a feature of the company's agricultural business due to changes in weather conditions and product yield levels. The decline in profit from continuing operations in 2012 is therefore a reflection of the decline in sales revenue during the year.

There was equally a drop of 18.7% in the gains on the value of biological assets in the year, leading to an overall fall of 14.9% in net profit in 2012. Net profit margin therefore declined from 94.6% in 2011 to 88.3% in 2012. Based on continuing operations however, net profit margin is virtually unchanged at 35.4% over the period.

Earnings per share is down from N22 in 2011 to N18 in 2012, now well below the over N26 per share earned by Nestle in 2012. It is yet quite a high figure not likely to be matched by any other listed company.

For investors and analysts, the company's full year result for 2012 was a big surprise from a company that posted N3.06 billion after tax profit at the end of the third quarter. The mild improvement in profit on continuing operations to N3.59 at full year is normal, as the final quarter is an off season period in the company's operations. The difference in the year is therefore the additional gains in the value of biological assets, which had not been included at the end of the third quarter.

Whether there will be further gains in the value of biological assets in 2013 is therefore a major factor that investors and analysts have to watch out for. How much will be the gain if it occurs is also another important factor to watch out for on the company.

Meanwhile, these gains have now taken the company to a height in share price valuation where its earnings on continuing operations could not have placed it. Whether it will stand or fall from there depends on whether more asset value gains will be converted into profit for yet another year and how fast the company's core business can grow to cover the gap created.

With the decline in sales revenue in 2012, the company had to adopt effective cost management to defend profit margin. A major cost saving came from cost of goods sold, which dropped by 39% against the 8.8% decline in sales revenue. That means the cost of a unit of sales dropped from 28 kobo in 2011 to 18 kobo in 2012. That raised gross profit margin from 72.3% to 81.5% over the period.

The company's earnings picture was also stabilised by income from non-core operations as well as the insignificance of interest expenses. Earnings from other works of the company more than doubled at N498 million in the year and other income rose more than four and half times to N517 million. Interest income of N170 million largely offset interest charges of N198 million during the year.

The rapid growth in asset value against a decline in sales revenue in 2012 indicates weakness in asset productivity. Asset turnover has declined from 0.5 in 2011 to 0.3 in 2012. The company needs to grow sales revenue significantly to justify the high and rising asset figures in the balance sheet.

The company has declared a dividend of N7.0 per share and a bonus of 1 for 1. This represents a cash dividend yield of about 10% based on the price of the stock when the dividend was announced. The company's register is scheduled to close on 14th May while payment date is yet to be advised.

The Okomu's dividend yield is so far unmatched in the stock market. It beats Zenith Bank's dividend yield of 7.6% and GTB's 5.2%. It is well ahead of Mobil Nigeria's dividend yield of 4.0% and Presco's figure of 0.4%. Nestle Nigeria's dividend yield is 2.0%, Lafarge Wapco's is 1.6% and Cadbury Nigeria's comes to 1.4%.

The company's bonus 1 for 1 means the volume of shares of the company will double to about 954 million in 2013. This indicates that earnings and dividend per share are very likely to drop in the current year even with further gains in the value of biological assets. In the absence of any further gain in asset value, the company will need to grow sales revenue and profit from continuing operations to be able to maintain reasonable dividend pay-out in 2013.