11 PLC Q2 2019 Results Review: Slight Changes To 2019-21E EPS ests.

Thursday, August 01,  2019  02:58PM / by FBNQuest Research

Neutral rating maintained

11 Plc’s Q2 2019 earnings of N2.1bn beat our estimate by around 6%, primarily on the back of positive surprises on the topline and opex line. As such, we have made negligible changes to our earnings forecast over the 2019-21E period. As anticipated, sales, up 14% y/y to N46.7bn, improved across all key business segments.

White products sales in Q2, which accounted for c.80% of total sales, advanced by 15% y/y at N37.3bn. Lubes sales grew by 9% y/y to N9.1bn while the firm posted Liquefied Petroleum Gas (LPG is a new business segment in 2019) sales of N316m.

We reiterate our view that prevalent policy constraints on gasoline prices will continue to materially limit growth through the year. Our new price target of N210.0 is up 11% because we have rolled forward our valuation to 2020. At current levels, our price target implies a potential upside of 33%.

Nonetheless, we retain our Neutral recommendation because of the absence of a positive catalyst in the near term. We forecast sales growth of 4% y/y to N169.6bn for 2019E. We also expect a relatively tough year for the industry as growing implicit subsidies continue to stifle growth, thereby weighing negatively on profitability.

According to industry sources, landing cost for gasoline over the past 12 months has been consistently higher than the federal government’s policy driven N145/litre pump price ceiling. We forecast flattish y/y earnings for 11 in 2019.

Year-to-date, the shares have declined by -14.8%, underperforming the NSE ASI by around 3%. The shares are trading on a 2019E P/E multiple of 6.3x for an average EPS growth of around 2% y/y in 2020E.

Q2 2019 PAT of N2.1bn declined -21 % y/y

Q2 2019 sales of N46.7bn were up 14% y/y, driven by improved sales across all key categories. 11 also posted liquefied petroleum gas sales of N316m. In H1, 11 reported LPG sales of N608m and is currently on track to hit N1bn in sales in 2019.

However, Q2 PBT and PAT both declined by -21% y/y to N3.2bn and N2.1bn respectively, primarily driven by a gross margin contraction of -228bps y/y to 8.3%, completely offsetting a -4% y/y decline in operating expenses. Additionally, other income fell by -12% y/y to N2.0bn.

Sequentially, PBT and PAT both advanced by 5% y/y. Compared with our forecasts, sales and PBT beat by 12% and 7% respectively.

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