Thursday, April 4, 2019 11:11AM / FBNQuest
Research / Header Image Credit: Total Nigeria
-11% reduction to our 2019-21E EPS estimates
Total Nigeria’s (Total) Q4 2018 earnings of N295m were disappointing. Although sales were up 21% y/y, significantly higher cogs and operating expenses weighed on profitability. The operating environment was tough in 2018 as the landing cost of gasoline was higher than the pump price for most of the year.
In addition to this, delayed payments under the Petroleum Support Fund (PSF) scheme and high cost of investments continued to inhibit growth. In Q4, Total posted an operating loss of –N4.4bn which was only offset by interest income of c.N6bn, attributable to delayed reimbursements under the PSF. Given the absence of a change in gasoline pricing policy, we expect another difficult year for the firm and forecast an EPS decline of around -40% y/y for 2019E. That said, we fully recognise that results could surprise positively, driven principally by further PSF and bridging claims reimbursements.
As at Q4 2018, receivables from the federal government were c.N16bn. Given the uncertainties surrounding government payments, we have had to discount the impact that payments could have on the firm’s P&L. We also anticipate the continued build-up of implicit subsidies given the resilient global crude oil market. Crude oil prices are currently averaging US$60/b ytd vs. our US$63/b estimate for 2019E. Given our subdued near term outlook, we have cut our EPS estimate over the 2019-2021E period by around -11%.
However, our new price target of N198.0 is down -29% because we have also lowered our long term growth expectation for Total by 300bps to 3%. Our price target implies an upside potential of +2.4%, hence, we retain our Neutral rating on the stock. Year-to-date, Total shares have shed –3.5%, broadly in line with the NSE ASI and are currently trading on a 2019 P/E of 13.9x for an average EPS decline of around –21% over the next two years.
Q4 earnings down -86% y/y, driven by -531bp y/y GM contraction
Q4 sales grew by 21% y/y (and 15% q/q). This sales growth was driven by a 27% y/y rise in white products sales to N70.5bn which more than offset a -7% y/y decline in lubricant sales.
However, both PBT and PAT declined by 69% y/y and 86% y/y to N659m and N295m respectively. The decline in profits was primarily driven by a gross margin contraction of -531bps y/y to 4.7% and operating expenses growth of 87% y/y to N8.6bn which more than offset a strong net finance income of N5.1bn in Q4 vs. a net finance expense of –N526m in the corresponding quarter of 2017.
Total’s proposed final dividend of N14.00 (vs. consensus’ N15.5 and our N17.00 forecast) implies a yield of around 7%.