Tuesday, November 1, 2016 1:11 PM / Vetiva Research
· Soft revenue in traditionally weak Q3
· Forecast cut to account for weak quarter
· Margins contract as currency woes bite
· Still up for a record FY
· TP revised to N206.30 (Previous: N214.82)
· Shares downgraded to HOLD after post liberalization rally
Soft Q3 revenue
MOBIL reported subdued earnings in the traditionally weak Q3. Despite a sizeable jump in retail prices following the liberalization of the PMS market, Q3 revenue came in below previous quarters (including a price-regulated Q1) suggesting to us that volumes must have been very weak during the quarter. Q3 revenue of ₦21.6 billion missed our ₦23.4 billion estimate.
Beyond the traditional weakness in Q3 (due to rains), we believe that the tight currency situation may have capped MOBIL’s volumes. We recall that in Q1, management said it engaged in some PMS imports (after a long lay off) which supported revenue growth in H1. However, we think management could have scaled back importation due to the overall tight currency situation and despite the fact that Majors get priority allocations from related upstream companies.
Nonetheless, 9M’16 revenue still came in at a record ₦71.9 billion, up 59% y/y due to strong prior quarters. We have thus adjusted our FY’16 revenue estimate to ₦96 billion (Previous: ₦109 billion), taking into cognizance the possible impact of a weak naira on import costs.
Margin contracts as currency woes bite
We can also infer the likely impact of a weaker naira from the significant gross margin contraction in Q3 to 13.1% (Q2: 19.2%, Q1: 16.8%). We believe MOBIL may have resorted to purchases from the NNPC or other third party suppliers for white products even as the weaker naira could have impacted production costs on Lubricants and other specialties.
We have to go back all the way to 2014 to find gross margin in the 13% region. EBIT margin for the quarter came in at 8.8% (Q2: 13.7%, Q1: 11.8%). Margins continue to be supported by rental income from real estate holdings with sister company Mobil Producing Nigeria Unlimited as anchor tenant.
As at 9M’16, rental income (after adjusting for related expenses) stood at ₦3.7 billion received from related party. We forecast this income line to close out the year at ₦4.8 billion.
FY’16 EPS cut to reflect Q3 performance
Whilst we expect tradionally strong Q4 to show some improvement over Q3, we are cautious over any material margin improvement given the yet to improve currency situation.
As a result, we cut our FY’16 gross margin estimate from 18% to 17%. With 9 months OPEX tracking in line with our estimate, our FY’16 assumptions for that line item remains intact. Following from these and a downward revision to our revenue line, we cut our FY’16 EPS to ₦22.01 (Previous:₦25.50).
Our FY’16 DPS estimate now stands at ₦15.00 (Previous: ₦17.85), an 8% yield on current market price. Despite our downward revision to earnings, MOBIL will still report record profits for FY’16.
However, with 23% rally since the liberalization of the market in May and limited upside to our target price of ₦206.30 (Previous: ₦214.82), we downgrade MOBIL shares to HOLD (Previous: BUY).