OANDO's upstream business to support its bottom-line; Chapel Hill recommends HOLD


Thursday, November 28, 2013 / Chapel Hill

Oando Plc (Oando) recently published its 9M-13 results and subsequently published additional information, which highlights the performance of the business segments in 9M-13. We upgrade our 12-month target price (TP) to N14.71 from N11.28, but maintain our HOLD recommendation on the stock.


9M-13 Review: Focusing on the money-makers
We raise our 5-year average EPS growth expectation to 22% yoy from 9% yoy previously. Our EPS upgrade reflects higher expected group profitability, given the strong revenue generation from upstream and mid stream businesses, and the declining involvement in the low margin downstream businesses. While
Oando is currently in the process of raising c. US$1.5bn for the acquisition of assets from ConocoPhilips, we have valued the company purely on the basis of existing assets and liabilities, as we see no clear basis to make specific assumptions about equity dilution or tier II capital raised. That said, we think Oando will continue to be a fairly leveraged business, with a 5-year average net debt to equity ratio of 76%. We believe this is positive for the business, as it is a moderation from the 261% net debt to equity seen in FY-12 and given its after tax cost of debt of 11% vs. 17% cost of equity. Oando has medium term plans to divest 45% of its equity in its petroleum marketing and energy services subsidiaries. This has reduced our CAPEX assumptions for the long term and in turn raised the free cash flow to firm (FCFF).    

Upstream business to support Oando’s bottom-line. On a common-size basis, Oando Exploration and Production (OEP) accounted for 3.4% of the group’s revenue in 9M-13, vs. 2.2% in FY-12. We forecast that it will rise to 4.6% by FY-13E, given robust crude oil production from the Abo and Ebendo oil fields. Oando’s declining involvement in the marketing of low-margin petroleum products is also likely to support OEP contribution. OEP’s EBITDA margin rose to 67.1% in 9M-13 from 56.4% in FY-12, reflecting more favourable conditions of oil evacuation from various fields. We forecast an FY-13E EBITDA margin of 66% for OEP and a 5-year average of 69%, with the drilling of additional wells and completion of more pipelines to evacuate oil more efficiently. We forecast a group EBITDA margin of 7.9% in FY-13E from 5.8% in FY-12, and a 5 year average of 11.5%.

Oando Gas and Power (OGP) to be an added positive in the medium term. We are encouraged by OGP’s efforts to diversify and grow revenues in the medium term. The company raised its gas distribution capacity in 9M-13 with the completion of a 150,000 scm/day Compressed Natural Gas facility, which would supplement the gas distribution from its pipeline companies. The facility is close to operating at full capacity and a second phase is to commence in the near future, which will double the capacity.   

We maintain our HOLD recommendation on Oando with a revised 12-month target price of N14.71. Oando has under-performed the market with a YTD return of 13% vs. the ASI YTD return of 39%. It however gained 24% in the last month, vs. 4% for the market. The stock currently trades on FY-14E P/E and EV/EBITDA of 4.1x and 5.6x respectively vs. its EM peer average FY-14E P/E and EV/EBITDA of 8.8x and 6.1x respectively.

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