ARDOVA 2019FY: Divestment and Subsidy Gains Provide Facelift for Earnings


Friday, March 06, 2020 /11:12 AM / By Meristem Research / Header Image Credit: The Whistler NG


Fuels Segment Maintain Strong Growth

ARDOVA PLC, previously known as Forte Oil (FO) in its 2019FY results, recorded a 31.07% growth in revenue to NGN176.55bn. The impressive topline growth rode on the back of a Q4:2019 standalone turnover of NGN53.00bn, the highest in 2019. Expectedly, Fuels sales was the key driver of topline, contributing NGN159.25bn (c. 90.20%) of gross revenue, which implies segment growth of 31.78% YoY and speaks to Ardova's effective product rationalization amidst the headwinds in the Nigerian downstream sector. The Lubricants and greases segment also saw improved Y-o-Y performance, as sales logged a 25.71% expansion to pitch in at NGN17.25bn (vs. NGN13.72bn in 2018FY). Contribution from Lubricants was relatively flat, Y-o-Y as it formed only 9.77% of revenue compared to 10.19% in 2018FY. The Solar system segment however pitched in lower than 2018, with a Y-o-Y decline of 360.73% to contribute a meager NGN0.04bn to topline. Liquefied Petroleum Gas (LPG) and Cylinder Sales printed a smaller NGN0.02bn.


With Prudent Energy's acquisition of a controlling stake in Ardova, the stronger LPG sales speaks to the company's strategy to utilize a sizable number of Ardova's retail stations to sell LPG. For further context, Prudent Energy completed the construction of a 6,000MT LPG plant in Delta State in 2019, which we expect to buffer growth of the LPG sub-segment going forward.


In 2020, we envisage that Ardova will seek to expand its presence in LPG, Aviation Fuel and leverage its alliance with Prudent in logistics and storage. We therefore expect that revenue will come in at NGN197.64bn in 2020FY.


EBIT Boosted Following Disposal of Subsidiaries

Cost to Sales settled at 93.61% in 2019FY; an uptick from 2018FY which came in at 91.59%. The Lube yet again, proved the most cost-effective segment of Ardova's business, with its cost to sales coming in at 74.34% for 2019FY. Cost to Sales for the Fuels segment was 95.36%, while the Solar and LPG segments recorded 105.13% and 105.60% respectively. Overall Cost-of-Sales therefore settled at NGN165.30bn, a disconcerting 33.96% YoY growth, given that it was higher than the revenue growth rate.


Operating profit rose by 83.81% Y-o-Y to settle at NGN4.93bn, albeit spiked by Ardova's gain on disposal of subsidiaries which came to NGN2.67bn. Finance costs rose by 35.72% to NGN4.83bn, as the company discounted its promissory notes. Alternatively, interest expense would have ticked up by only 4.28%. There was a significant 306.61% gain in finance income – NGN4.56bn, as the FG addressed non-payment of FX differentials on subsidy to the company, which contributed 86.66% (NGN3.95bn) to total finance income. Net finance costs for 2019FY thereby dropped to 0.27bn (vs NGN1.9bn in 2018FY), supporting Pre-tax earnings growth of 513.56% (NGN4.65bn). Net income settled at NGN3.92bn, a Y-o-Y increase of 983.11% (EPS: NGN3.00 vs. NGN0.28 in 2018).


Shareholders Return Improve Along with Return on Assets

Return on Equity (ROE) came in at 9.82% in 2019FY (compared to 0.61% in 2018FY). Return on Average Assets (ROAA) also improved from 0.25% to 4.18%. This speaks to Ardova's total assets shrinking from N61.20bn in 2018FY to N49.60bn in 2019FY, following the company's divestment from its subsidiaries as highlighted earlier. Total Debt ratio came in at 11.68% (vs 37.63% in 2018FY) as no term loans or borrowings were recorded in the year.


Outlook and Recommendation

With gains from its divestment, we envisage Ardova will seek to expand its retail footprint and have a stronger focus on Lubricants to boost its top and bottom line. Our 2019FY expected EPS is NGN2.88, and with a target PE of 6.32x, we arrived at a target price of NGN19.66, an upside potential of 28.47% to the current share price of NGN15.30. We therefore recommend a BUY.


Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.


Proshare Nigeria Pvt. Ltd.

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Proshare Nigeria Pvt. Ltd.

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