Since 2023, the business environment has faced significant challenges, including high inflation, fluctuating interest rates, and volatile exchange rates.
Despite these macroeconomic hurdles, the palm oil sector remains attractive to investors, largely due to the persistent gap between high demand and insufficient supply.
Leading players in this sector, Okomu Oil and Presco, have effectively navigated these difficulties. Their recent second-quarter 2024 results are promising.
Financial Performance
In the first half of 2024, the combined revenue of the two companies reached N163.028 billion, marking an approximate 84% increase compared to the previous year and accounting for 92% of their combined revenue for 2023.
- The fact that the first half of 2024’s combined revenue accounts for 92% of the total revenue for 2023 suggests that both companies are on track to achieve, or even exceed, their previous year’s revenue figures. This indicates strong performance and consistency.
- This performance provides a positive outlook for the remainder of 2024. If Okomu Oil and Presco maintain their growth trajectory, it could boost investors’ confidence
Profit Margin Analysis
Both companies sustained strong profit margins during the first half of 2024.
- Average Gross Profit Margin: 57%.
- Average Operating Profit Margin: 51%.
- Average Pre-tax Margin: 48%.
- Average Net Income Margin: 36%
Presco recorded stronger margins across different profitability levels, retaining 62% of its revenue as operating profit, compared to Okomu’s 41%.
This efficiency is attributed to Presco’s increased revenue and lower cost of sales. Despite Presco’s higher revenue, its cost of generating that revenue was lower than Okomu’s. Presco spent N22.4 billion to generate N88 billion in revenue, while Okomu spent N30.47 billion to generate N75 billion.
However, Okomu still maintained a significant 41% operating profit margin, indicating good operational practices with room for improvement in cost management.
Shareholders Return:
In the first half of 2024, both companies offered strong returns to equity holders, with Presco achieving a higher return of 54% compared to Okomu’s 44%.
An analysis of the results shows that Presco’s higher leverage (2.7x) and net profit margin resulted in the higher ROE, while Okomu’s better efficient asset utilization provides a competitive ROE with potentially lower risk.
Share Price and Dividend Trend
Over the past five years (2019 – 2023), Presco’s share price has increased by 202%, while Okomu Oil’s share price has risen by 241%.
In 2023, Presco achieved a year-to-date (YtD) gain of 40.36%, compared to Okomu Oil’s YtD gain of 58%.
Following the release of their Q2 2024 results, both companies have reached new 52-week highs. As of August 1, 2024:
- Presco closed at N413, marking a YtD gain of 114% and ranking seventh on the NGX.
- Okomu Oil closed at N260, with a YtD gain of 26% and ranking 55th on the NGX.
Both companies have demonstrated a consistent commitment to paying dividends over the past five years.
Last year, Presco distributed a total dividend of N26.30 per share, while Okomu Oil paid a dividend of N22 per share. Currently:
- Presco offers a dividend yield of 6.37%, resulting in a total return of 120.36%.
- Okomu Oil provides a dividend yield of 7.53%, resulting in a total return of 19.84%.
Valuation Analysis:
Okomu Oil reported earnings per share (EPS) of N21.17 for the first half of 2024, resulting in a trailing twelve-month (TTM) EPS of N26.78 and a price-to-earnings (P/E) ratio of 10.90. In comparison, Presco achieved a higher EPS of N38.88, leading to a TTM EPS of N46.96 and a lower P/E ratio of 8.79.
Presco’s latest quarter price-to-book (P/B) ratio is 5.76, while its trailing twelve-month (TTM) price-to-sales (P/S) ratio stands at 2.90. In contrast, Okomu Oil has a P/B ratio of 6.09 and a P/S ratio of 2.54.
Investment Implications
Presco’s lower P/E ratio suggests it may be undervalued compared to Okomu Oil, offering more earnings per stock price unit. Its lower P/B ratio also indicates it could be trading below its book value, appealing to value investors. However, Presco’s higher P/S ratio shows the market values its revenue at a premium, potentially due to stronger growth expectations.
In contrast, Okomu Oil’s higher P/B ratio suggests investors are willing to pay more for its book value, possibly reflecting higher growth expectations or perceived asset value. Despite its lower risk due to reduced leverage, Okomu Oil’s slower price appreciation may limit its short-term growth compared to Presco.
Overall, Presco offers strong growth potential and is attractive for investors seeking higher returns, assuming they accept the associated risks. Okomu Oil is less risky but may offer slower growth. Investors should choose based on their risk tolerance and investment goals.
