INVESTMENT HIGHLIGHT
Q1 2017: High Cost of Sales impedes profit growth despite Revenue Growth
Total Nigeria (or the “Company” or “Total”) Plc, a petroleum marketing and distribution Company released its first quarter earnings for the period ended March 31, 2017 on the 26th of April 2017.
The Company reported a 34.8% growth in revenue, to ₦80.46 billion ($220.45 mn) from ₦59.71 billion ($163.57 mn) Year on Year (YoY), gross profit was up marginally by 1.2%, to ₦8.99 billion ($24.66 mn) from ₦8.89 billion ($24.36 mn) YoY. The less than impressive gross profit growth is adduced to the stronger growth in cost of sales of 40.6% YoY. Net foreign exchange gain of ₦371.32 million ($1.02 mn) compared to a loss of ₦203.11 million ($556.47 thousand) in the same period last year, boosted other income which grew by 125.5% YoY This expansion in other income, along with a 28.2% decline in sales and distribution expenses YoY, prompted an 11.3% rise in operating profit from ₦4.01 billion ($20.98 mn) to ₦4.46 billion ($12.23 mn) YoY. Ultimately, profit after tax decreased by 5.4% to ₦2.67 billion ($7.32 mn) from ₦2.82 billion ($7.74 mn) due to high costs, increased finance costs and higher tax rate. Operating profit margin dropped to 5.6% from 6.7% YoY, gross profit margin contracted to 11.2% from 14.9% YoY, return on equites declined to 10.2% from 14.8% YoY and return on assets reduced to 1.8% from 3.3% YoY.
Petroleum products sales made up 83.8% of revenue, lubricants and others contributed 16.2%, compared to 13.4% of total revenue in the same period last year. Inventories contracted by 44.2%, trades and receivables was up by 76.3% to ₦85.52 billion ($234.31 mn) from ₦48.50 billion ($132.87 mn) which in turn led to higher borrowings.
Quarter on Quarter
Revenue had been on a decline from Q3 2016 but the trend was reversed in Q1 2017. The Quarter (Q1 2017) saw the second highest revenue recorded since the partial deregulation of the sector (highest in Q2 2016), but high cost of sales and finance costs impeded translation of earnings to the bottom line. However, the Company has still been unable to generate revenue from petroleum products sales as that realized in Q2 2016 (₦75.58 billion). Turnover from Petroleum products sales rose by 12% Quarter on Quarter (QoQ), and that from lubricants and others rose by 24% QoQ.
VALUATION ANALYSIS
Based on our analysis, the stock is currently trading at an 18.5% discount to our fair value of N320.00 ($0.88) with a 12 month investment horizon. We focused on the historical financial performance of the stock and our expectation for FY 2017 to arrive at our fair value for the stock.
Our fair value for Total shares was calculated using the Dividend Discount Model (DDM) comprising our expected dividend for the Company and GTI Securities customized tweak to adjust for the risk of investing in the Nigerian oil and gas sector. Our Required Rate of Return (RROR) factors in a risk premium of 11.15% and the yield for the most recently issued 20-Year FGN Bond was applied as the risk free rate of return.
We have placed a BUY rating on the stock of Total Nigeria Plc.
FORECASTS
Our FY 2017 revenue forecast for Total is ₦309.85 billion ($848.90 mn) which represents a 6.5% growth relative to FY 2016.
We expect the growth in lubricants sales which was prevalent in the first quarter to continue and contribute higher values to total turnover.
The first quarter result showed that the Company was not effective in cost management thereby leading to a depletion in profit. We project a 4.7% rise in profit after tax to ₦15.49 billion ($42.44 mn) in FY 2017 which generates an EPS of ₦45.63 and a forward P/E of 5.81X.
INVESTMENT OUTLOOK/CONCLUSION
The shares of Total currently trade at an 18.5% discount to our fair value estimate of ₦320.00.
The Company took advantage of the partial deregulation of the downstream sector that occurred last year by growing its revenue to record highs despite the macro-economic constraints in the country. Though Fx volatility seemed to have restricted competitors from pushing higher sales of petroleum products in Q1 2017.
Total being a major player in the downstream sector with a wide distribution network of over 500 retail outlets nationwide is in a strong position to sustain its topline growth, but with stability returning to the forex market, competitors might take market share off them as the year progresses which will hinder the Company from achieving the rate of revenue growth that was seen in FY 2016. Reduction in cost of importing products will in turn lead to translation of more topline to bottom line growth for the Company.
Going forward, the plans to maximize production from local refineries and the addition of the Dangote refinery, it will ease cost margins and profit margins will in turn increase even if revenue does not grow to a large extent.
We have a BUY recommendation on the shares of Total Nigeria Plc for investors who have a one to two year horizon.
DISCLOSURE
Conflict of Interest
GTI Securities Ltd and its sister companies within the GTI Group may execute transactions in securities of companies mentioned in this document and may also perform or seek to perform investment banking services for those companies mentioned herein. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and report(s).
Analyst Certification
Where applicable, the views expressed in this report accurately reflect the analysts’ views about any and all of the investments or issuers to which the report relates, and no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendations, views or corporate finance transactions expressed in the report.
Disclaimer
This report by GTI Securities Ltd is for information purposes only. While opinions and estimates therein have been carefully prepared, the company and its employees do not guaranty the complete accuracy of the information contained herewith as information was also gathered from various sources believed to be reliable and accurate at the time of this report. We do not take responsibility therefore for any loss arising from the use of the information.
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