Monday, July 01, 2016 6:48PM /ARM Research
Mobil released its Q2 16 result where earnings of
N2.6bn (+81.1%YoY) came in ahead of our estimates of N1.6bn. Strong earnings reflect sharp recovery (+80% YoY) in revenue to N27 billion which beat our estimate by 31.8% and knocked-off the negative surprise in input cost and the opex line (31% and 6% ahead of our estimate).
We believe strong sales reflect the May 2016 hike in PMS prices (+67.6% to
N145) as well as robust volumes growth. On the latter, Mobil benefited from the inability of the smaller independent marketers to keep outlets wet due to forex shortage. Unlike the smaller marketers, Mobil, like other majors marketers, is able to access forex via a special window at ( N285/$1) and thus enjoyed ample product supply over the period.
Earnings margin stay upbeat despite input cost concern
On the flipside, the costs tale was mixed. While input costs quickened to
N22.3billion (+80.6% YoY) operating expenses rose only 14.9% YoY to N2.4 billion. However rental income of c. N1billion largely supported the increase in operating margins which filtered to bottom line with PBT and PAT which expanded to 13.9% (+50bps YoY) and 9.4% (+10bps YoY) respectively.
Further NGN depreciation poses risk to outlook
Going forward, sustained depreciation of the naira raises concern on the next move by the regulators. The three (3) options for the regulators will be an increase in petrol price, downward revision in marketer’s margins or a re-introduction of subsidy payments. Of the three options, we think an increase in petrol price is more likely given fiscal pressures.
However, we note that the acceptability by the populace given spiraling cost of living may force the regulators to explore the latter options. Thus, should this come to play, we may see downside risk to earnings momentum.
However, rental income which contributed about c.80% to earnings in Q2 16 (average of 78.9% in the last 10 quarters) should continue to support its earnings, making it a defensive stock to shock from regulatory risk. In addition, we see higher margins from its lubes business supporting earning momentum.
In all, despite performance exceeding our expectation, we remain conservative on Mobil profitability in FY 16E relative to its strong H1 16. Consequently, we retain our earnings expectation of
N18.75 per share (+38.1% YoY). Gross, EBIT and PBT margin are forecast to expand to 17.8% (+70bps YoY), 12.3% (+140bps YoY) and 12.3% (+154bps YoY). EPS growth at 38.1% YoY to N18.75 ( N13.57 – FY 15).
Mobil currently trades at a P/E of 9.2x relative to 12.3x average for domestic peers. Current market price of
N170.10 implies a 5% premium to our fair value estimate of N178.64. We rate the stock NEUTRAL.