Monday, June 11, 2012 / ARM Research

Moderate turnover performance drives turnover 

• MRS Oil Plc (MRS) released its unaudited financial performance for the 3 months ended March 31st 2012.  MRS posted 9.1% revenue growth YoY to N19.2 billion; 6.36% above our forecast for the period. We believe the company’s slower turnover growth compared to peers ~23.5% reflects lower utilization of the company’s allocation quota, possibly due to uncertainty over subsidy removal in the period.
 

Margins compression continues 

• For similar reasons, MRS’ cost of sales rose a slower 10.24% YoY compared to peer average of 29.3% -- we believe MRS also sold from its inventory backlog, which it purchased at a lower price, given the subsidy uncertainty mentioned earlier – limiting the impact of higher product costs during the period. Nevertheless, higher cost of sales may also reflect higher demurrage charges -- due to delays in product shipments through the ports in Q1’ 2012, a phenomenon that was consistent across the industry.  This performance translates to a 98bps decline in gross margin to 7.17% YoY.

• The ongoing rebranding exercise –expected to be concluded in Q2’2012 - and the associated staffing costs of its stations was largely responsible for the 12.24% rise in Selling, Distribution & Administrative expenses to N1.2 billion. Consequently, the operating margin deteriorated by 268bps to 1.28%.
 

Earnings fall short 

• In line with Operating Income, MRS’s PBT in Q1’ 2012 declined 66% YoY to N236 million, 15.27% below our forecast for the period. As a result of the dip in PBT, MRS experienced a decline in its tax charges YoY to N113 million, while PAT consequently declined 64.9% to N123 million YoY; 51.9% below our forecast.
 

We revised our target lower on   

• Data released by the PPPRA in H1’21012 indicates that while there was  an  increase in import quota allocations to major marketers in H2’2012,  MRS was less favored -- on a percentage volume increase basis YoY -- than other majors. Also, other major marketers have invested heavily in their product supply networks in recent years, which we expect to continue to impede MRS’s revenue growth.

• Due to the increasingly evident effects of MRS’s weak branch network and competitive position within the industry, we have revised our turnover forecast for FY’2012 5% lower to N68.5 billion reflecting the increasingly strong competitive position of MRS’ peers within the Petroleum Marketing sector. Nevertheless, we maintain the previous forecast run rate in turnover growth of 6.8% through 2015; our bearish medium term outlook for the company is based on its passive network strategy, even as other majors embark on aggressive network expansion.

• We have also adjusted Opex forecast 5.1% higher to N4.5 billion reflecting the higher anticipated administrative costs in FY’2012 as MRS continues its rebranding program across its network. The net result of these adjustments was a 27% decline in our PAT forecast for FY’2012 to N1.5 billion.

• The result of the changes highlighted above resulted in decline in our target price to N37.29, which leaves the stock trading at a 2.1% discount to our valuation. MRS trades at a current and forward PE of 6.12x and 5.85x respectively, below its peers’ average current and forward PEs of 10.24x and 6.37 respectively. Nevertheless, given the limited growth we project for MRS relative to peers and the consequent limited headroom provided by our target prict to current, we retain our SELL rating on the stock.
 

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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:

Source: Company financials, ARM Estimates