Oando Plc: Fall in revenue weakens margins

Proshare

Saturday, November 23, 2013 / DLM Research

Revenue and post-tax profit decrease by 20.81% and 34.29% y/y. In its nine months to September 2013, Oando Plc (Oando) reported sales revenue and post-tax profit of N386.25billion and N6.09billion, down by 20.81% and 34.29% y/y respectively from N487.77billion and N9.27billion recorded in 2012. The decrease in revenue reflects a slowdown in the firm’s downstream business segment as the firm reduced its exposure to PMS imports, which have historically contributed c.65.12% to its downstream revenues, in its bid to protect its balance sheet and operations from the uncertainty in the management of the petroleum subsidy fund.
 

Sales revenue and post-tax profit for Q3 2013 came in at N105.92billion and N1.62billion respectively. Sales revenue in Q3 2013 - the lowest in the last seven quarters - is 22.78% below N137.16billion recorded in Q3 2012 and 33.49% below N159.26billion posted in Q2 2013. Post-tax profit for Q3 2013 recorded a 38.83% decrease compared to N2.65billion posted in Q3 2012, but rose by 1.25% compared to N1.60billion recorded in Q2 2013 (Fig. 1).
 

The firm has continued to strengthen its mid and upstream businesses. In the period under review, Oando completed its compressed natural gas facility and the delivery of its second independent Alausa IPP power plant. According to management, the firm’s upstream energy services division has fully refurbished its fourth swamp drilling rig while its exploration and production business increased the drilling of additional wells in order to improve production capacity. The firm has also made progress on the construction of an alternative evacuation pipeline for OML 56 (Ebendo Field). In our view, this will significantly increase the firm’s production capacity upon completion. 

Decline in cost of goods sold (COGS) lifts gross margin. In 9M 2013, Oando recorded a 21.89% y/y decrease in COGS to ₦339.53billion relative to ₦434.66billion in the same period of 2012. Consequently, COGS/revenue ratio decreased to 87.90% in 9M 2013, from 89.11% in 2012 despite the drop in sales revenue. This is despite the 12.03% y/y fall in gross profit to ₦46.73billion from ₦53.11billion in 9M 2012. On a quarterly basis, the firm posted COGS of ₦89.43billion, representing a y/y and q/q decrease of 22.28% and 37.06% from Q3 2012 and Q2 2013 levels of ₦115.06billion and ₦142.08billion respectively. As a result, Q3 2013 gross profit margin came in at 15.57% compared to 10.69% and 16.11% in Q2 2013 and Q3 2012 respectively.
 

Decline in finance cost and income tax expense failed to lift margins. Notwithstanding the y/y double-digit fall of 54.90% in income tax expense to ₦3.67billion in 9M 2013, and the 4.46% y/y decrease in finance cost to ₦10.250billion, Oando’s post-tax profit decreased by 34.29% y/y to ₦6.09billion in 9M 2013, bringing its net profit margin to 1.58% in 9M 2013, down from the net profit margin of 1.90% recorded in 2012. This implies that Oando converted 1.58% of its sales revenue to profit in the period. In addition to the increase in total overhead/revenue ratio, the decrease in net profit and margin was driven by the 28.02% y/y fall in other operating income to ₦3.52billion.


 

Operating expenses (opex) decreased by 3.32% y/y to ₦31.86billion in 9M 2013 from ₦32.96billion in 2012 on the back of a 23.53% decrease in selling and marketing expenses to ₦5.20billion from ₦6.80billion in 9M 2012. This resulted in an increased opex/revenue ratio of 8.25% in 9M 2013, compared to 6.76% in 2012, mainly as a result of the faster drop in sales revenue in the period. Overall, total overhead/revenue ratio rose to 96.15% in 9M 2013, from 95.87% in 2012. This resulted in a decline in operating profit margin to 4.76% in 9M 2013, from 5.13% in 2012.


Stock now fully priced, in our view. Our revised valuation reveals that the stock of Oando is fully priced, relative to its current market price of ₦15.87. We arrived at our revised target price of ₦15.52 using absolute and relative valuation techniques with weightings of 49%/51% respectively. Relative to its current market price, our revised target price implies that the stock of Oando has a potential downside of 2.21%; therefore we review our recommendation to a HOLD.

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