Wednesday, August 14, 2019 /2:40PM / Meristem Research / Header Image Credit: Conoil Plc
In White Products We Trust
Yet again, CONOIL applied its extensive retail footprint to grow revenue to NGN72.22bn (+32.56%) in H1:2019, reflecting the considerable topline growth witnessed across the industry. Like 2018, revenue expansion came primarily from white product sales, with a contribution of 95.14% (NGN68.71bn), (vs. 94.96%; NGN51.74bn) in H1:2018 – no different from its 2018FY scorecard. During the half year, Lubricants also chipped in NGN3.51bn, a 27.98% Y-o-Y growth. With a network of 395 dealers across Nigeria and a concentration in the commercial hubs of Lagos and Abuja, CONOIL has been able to achieve the status of brand of preference amongst commercial vehicle operators.
We however note that the company has reported nil revenues from its LPG segment since 2017, and only reported direct costs of NGN167,000 in 2018. Considering the pace of growth in LPG adoption in Nigeria, CONOIL’s significant LPG investment and the fact that contributions from the segment amounted to 3.86% (NGN3.42bn) of revenues in 2016, we opine that topline has potential to print much higher. However, company management took a strategic decision to shut down the LPG business temporarily and plans to reopen before 2019-end. This, coupled with the company’s strong brand equity and growth of the downstream sector, is expected to spur topline growth of 16.37% in 2019FY to reach (NGN141.88bn).
Sticky Direct Costs Mirror Industry Woes
CONOIL’s direct sales treaded much of the same path as the rest of its downstream peers in H1:2019. At 36.26%, the company’s direct cost growth rate was relatively pacier than that of its revenues, with Cost-to-Sales (CtS) ratio settling at 90.73% for the year (compared to 88.27% for H1:2018) and printing at NGN65.53bn. CONOIL’s CtS was however lower than most of its industry peers (including MOBIL, ETERNA, MRS and FO). Only TOTAL (88.91%) outperformed the company in this key metric – a pointer to the fact that leveraging retail strength remains a game winner in this traditionally lean-margin business. Notably, much of the increase in overall cost of sales came from the White Products segment which saw a 36.66% expansion in costs. Gross margin therefore pitched in at 9.27%.
On the other hand, OPEX-to-Sales for H1:2019 was lower at 5.63% (vs. 8.50% in H12018), with OPEX at NGN3.57bn. Interestingly, the company’s depreciation expense also declined by 20.53% in the half year, as PPE reduced by 10.75% to NGN2.75bn owing to the slower pace of additions. EBITDA was at NGN3.19bn, from NGN2.51bn a year ago, with operating profit also advancing by a substantial 42.48% to reach NGN2.69bn. Pre-tax and Post-tax profits were however dragged by a 104.00% increase in borrowings, as finance costs saw a 8.63% uptick. Pre-tax margin therefore settled at 2.10% (NGN1.52bn), while after-tax earnings ticked up to NGN1.03bn, a net margin of 1.43%. 2019FY earnings expectation is NGN2.30bn (EPS: NGN3.31).
Adept Balance Sheet Management Could Deliver Better Returns to Shareholders
During the period, inventories moderated by 3.60% to NGN8.81bn, even as trade receivables ticked up by only 1.76% to NGN30.83bn. While payables weakened by 12.45% (NGN30.70bn), Borrowings increased by 1.04 times to NGN9.72bn, which is a cause for concern, considering the cash hoard of NGN16.00bn and significantly higher finance costs of NGN1.17bn (H1:2018: NGN1.08bn).
Outlook and Recommendation
After a 4-month lull and suspension by the NSE, CONOIL finally published its 2018FY, Q1:2019 and H1:2019 results in July. We note that late filing has become characteristic of the company, after series of similar occurrences in 2017 and 2018. This, alongside frequent C-suite changes are signs of weak governance structures, which impair investor perception and erode company value.
However, with these results, CONOIL is staking its name for the status of “downstream darling”. We envisage earnings will grow by 27.78% to NGN2.30bn this year, which puts expected EPS at NGN3.31. Our target PE of 8.5x suggests a 2019 Target Price of NGN28.11, with a BUY recommendation.