Friday, April 20, 2018 /10:45 AM / FBNQuest Research
Price target up 9% to N290.0
Total Nigeria (Total) Q4 2017 earnings of N2.1bn declined by -35% y/y. The decline was unsurprising given the strength of the 2016 results, which were skewed by favourable government policies due to fx supply constraints.
Notwithstanding, Q4 earnings beat our forecast by 66%. Looking ahead, we have raised our EPS forecasts over the 2018-2019E period by 16%, mainly because we expect improved sales, driven by product volume growth and a gross margin expansion of c.100bps over the period. We believe product sales are likely to be driven by better petroleum product availability.
In 2017, inadequate access to fx for the importation of AGO & DPK limited sales. Even though the price ceiling for gasoline limits upside potential, it appears the NNPC is prepared to carry the burden through the year, similar to 2017. We do not expect the federal government (FG) to fully deregulate gasoline prices this year. To our minds, gross margin is set to benefit from a 33% rise in the firm’s lubricant production capacity.
In 2017, Total increased its market share in the higher margin lubes market by c.250bps. With global crude prices currently around US$70/barrel, implicit gasoline subsidies are set to expand. Therefore, we do not anticipate any material alterations to Total’s operational strategy, with its primary focus set on product distribution. We forecast an EPS decline of c.-4% in 2018E because 2017 earnings were elevated by a one-off income of N1.6bn on fx forward contracts.
Our new price target of N290.0 is higher by 9% and implies an upside potential of 24% from current levels. However, we retain our Neutral rating on the stock. Total shares are currently trading on a 2018 P/E of 10.4x for an EPS growth of 4% in 2019E.
Earnings down by 35% y/y
In Q4 2017, sales, PBT and PAT all declined, by -6% y/y, -37% y/y and -35% y/y to N66.9bn, N2.1bn and N2.1bn respectively. In addition to the sales decline, a gross margin contraction of -1,415bps y/y to 10.0% fully offset any benefits coming through from a -7% y/y decline in opex.
Net finance charges grew 52% y/y to –N526m on the back of rising funding costs. Other income of N573m compared with a loss of –N8.4bn posted in Q4 2016.
Sequentially, while sales and PBT both declined by -2% q/q and -11% q/q respectively, PAT grew by 53% q/q due to a relatively lower effective tax rate of just 2.6%. Compared with our estimates, while sales were in line with our forecast, PAT beat by 66%. The variance was mainly driven by positive surprises on the opex and net finance expense lines.