•Mobil Oil Plc’s (Mobil) financial performance in the three months ended March 30th 2012 showed a pickup in its sales volumes with a YoY and QoQ revenue growth of 22.1% and 3.4% respectively to N17.7 billion – surpassing our forecast by 7.6%. As with Total Plc, Mobil’s Q1’2012 performance was its best in over a decade and reflects an improvement in the company’s through-put, in spite of the 48% price adjustment in PMS prices to N96/litre in January 2012 and disruptions occasioned by the labour union strikes soon afterwards. We suspect Mobil’s performance was also supported by relatively stable product prices on international markets QoQ and a higher import quota granted to the company in Q1’2012.
Opex stable as COGS rise erodes profits
•Q1’2012 cost of sales rose 35.1% YoY to N16.1 billion, 13.9% ahead of our forecast for the period. Consequently, gross profit actually declined 35.9% YoY to N1.7 billion, which is 28.9% below our N2.4 billion forecast for the period. This decline translates to an 869bps decline in gross margin to 9.6% -- well below Mobil’s historical average of 16.4%. We believe that the deterioration in Mobil’s grossmargin during the quarter was the result of higher demurrage charges due to delays in product shipments through the ports in Q1’2012, and suboptimal product price hedging activities due to the uncertainty surrounding Nigeria’s subsidy regime during the period.
•In spite of Mobil’s higher volume sales YoY, operating expenditure was unchanged YoY at N1.6 billion in Q1’2012 and 3.3% above our forecast for the period. Consequently, operating income declined 57.4% YoY to N697 million, in line with the dip in gross profit; resulting in a 722 bps YoY decline in operating margin to 3.9% -- which is also well below Mobil’s historical average operating margin of 7.4%. We note that activities relating to the upgrade of Mobil’s real estate assets, had led to a significant increase opex in H2’2011. The current results suggest that this initiative has largely been completed, allowing improvements in the company’s logistics to feed through to earnings. Contributions from real estate income, an important line in Mobil’s earnings, was unchanged YoY at N619 million.
•In line with Operating Income, Mobil’s PBT in Q1’2012 declined 57.1% YoY to N686 million, 52.1% below our forecast for the period. As a result of the dip in PBT Mobil experienced a 56.7% decline in its tax charges YoY to N223 million, while its PAT declined 49.6% YoY to N464 million (which was 52.18% less than our forecast).We revised higher our forecast interest expense for 2012 and 2013 substantially higher to reflect the company’s increased dependence short term borrowings in a high interest rate environment.
Stock still expensive, in our view
•We believe that much of Mobil’s poor earnings performance in Q1’2012 reflects the exceptionally challenging operating conditions related to the attempted deregulation of the downstream sector in January 2012. While the immediate impact of subsidy saga has receded, we expect Mobil’s Q1’2012 performance will weigh on our earnings forecast through 2012. Furthermore, though competition appears to have moderated following the NNPC’s recent exclusion of some independent marketers from import quotas in 2012 -- which removes one of the key headwinds we anticipated for the sector -- Mobil’s limited efforts to expand its sales network implies that it is unlikely to benefit to the same extent as its peers. We expect revenue growth to remain robust in 2012 but do not expect a significant YoY rebound in profitability despite stability in petroleum product prices in H2’2012, which we anticipate on the back of improved hedging activities by major marketers and stable to lower crude oil price -- supported by persistent weakness in developed economies.
•Accordingly, while we have retained our FY’2012 turnover forecast of N66.2 billion, which implies a 12% YoY rise—and maintain the previous forecast run rate in turnover growth of 7.1% through 2015; our bearish medium term outlook for the company based on its passive strategy, even as other majors embark on aggressive network expansion. In a sector where performance is chiefly determined by through-put volume we believe that Mobil’s strategy places the company at a disadvantage relative to other major marketers in the medium term. We also cut our PAT forecast for FY’2012 by 16.9% to N4.7 billion reflecting the shortfall in Q1 earnings performance and further cost pressures that are likely to arise in 2012’s inflationary environment.
•On this basis we also revise our target price lower to N102.53 from N107.74, leaving Mobil’s last closing price at a 29.6% premium to target. Mobil trades at a trailing and forward PE’s of 9.1x and 8.7x respectively, a significant premium to the sector’s corresponding figures of 6.3x and 5.8x respectively, in spite of it’s significantly lower growth expectations. We reiterate our SELL rating on the stock.
ARM ratings and recommendations ARM now employs a two-tier rating system which is based on systemic importance of the security under review and the deviation of our target price for the stock from current market price. We characterize systemic importance as a function of a stock’s ranking among the group of top 20 stocks by NSE market capitalization over a trailing 6 month period (minimum) to the review date. We adopt a 5 point rating system for this category of stocks and a 3 point rating system for stocks outside this group. The choice of top 20 stocks arises from the consideration that this group of stocks constitutes >75% of overall market capitalization and stocks outside this group are generally less liquid and individually account for <<1% of market capitalization. For stocks in both categories, the basis for ratings subject to target price deviation is outlined below:
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