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Strutting The Earnings Runway: Ardova Records Impressive Q3 2020 Results

Stock & Analyst Updates	866 VIEWS
Stock & Analyst Updates
866 VIEWS

Tuesday, November 25, 2020, / 12:10 PM / by Bukunmi Adejobi, Proshare research /Header Image Credit: Ardova Plc

Ardova Plc (formerly Forte Oil Plc) Q3 2020 result showed an uptick in performance as the company grew both top and bottom-line earnings compared to its counterpart period in 2019. The downstream oil marketer appears to have evolved a market strategy that shielded it from the gusty coronavirus-induced headwinds that decimated the financials of its close rivals.

Revenue of the company bounded upwards in the first 9months of 2020, with topline income rising to N128.17bn, representing a short pogo jump of +3.75% over the preceding year's N123.54bn.

Highlights

Revenue grew by +15.89% to N40.87bn in Q3 2020 from N35.26bn Q2 2020.
Profit before tax for the company grew by +111.31% to N1.25bn in Q3 2020.
Administrative and distribution expenses grew by +24.93% and +21.261% in Q3 2020, respectively.
Profit after tax grew significantly by +70% to N875.38m Q3 2020 from N514.92m recorded in Q2 2020.
The company posted an increase in Total Assets of +9.86% in Q2 2020 to N45.34bn from N49.81bn recorded in Q3 2020.
Equity rose by +5.10% to N18.02bnbn in Q3 2020 from N17.17bn in Q2 2020

Getting A Whiff of Higher Income and Sultry Profits

Revenue

The quarter-on-quarter (Q-o-Q) analysis shows that revenue increased by +15.89% to settle at N40.46bn from N35.26bn recorded in Q2 2020. The revenue growth was majorly driven by an increase in earnings from fuels, lubricants, and sales from Liquefied Petroleum Gas (LPG) and Cylinder, although the company recorded a decline in Solar system revenue. (see chart 1 below)

Chart 1: Ardova Revenue Q3 2019- Q3 2020(N'm)

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Source: Ardova Financial Statement, Proshare Research

Profit Before Tax

Ardova's operating profit grew significantly by +77.04% Q-o-Q. Pretax Profit was up for the quarter; it grew significantly by +111.31% to N1.25bn in Q3 2020 from N591.08bn recorded in Q2 2020. The major driver of the growth in PBT was the increase in finance income by +68.97% from N42.61m recorded in Q2 2020 to N72.0m in Q3 2020. The increase in finance income was supported by an increase in Interest income on bank deposits and other interest income on investments. (see chart 2 below)

Chart 2: Ardova Profit Before Tax Q3 2019- Q3 2020(N'm)

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Source: Ardova Financial Statement, Proshare Research

Having A Ball with Activity Ratios-The Art of The Business

Liquidity Ratio

The oil marketer's liquidity ratio for Q3 2020 was 9.11% compared to 4.36% recorded in Q2 2020. The company managed its liquidity risk by ensuring that sufficient funds were available to meet its current liabilities. However, the company's liquidity position recorded its first increase since Q1 2020. (see chart 3 below)

Chart 3: Ardova's Liquidity Ratio Q3 2019- Q3 2020

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Source: Ardova Financial Statement, Proshare Research

Leverage Ratio

Ardova's leverage ratio stood at 23.71% in Q3 2020 as against 23.78% recorded in the previous quarter Q2 2020, the steady decline of leverage ratio from Q3 2019 till Q3 2020 shows a significant decline in Ardova's debt size although the Company's interest-bearing loans and borrowings increased by 4.80% in Q3 2020 to N4.28bn from N4.08bn recorded in Q2 2020. (see chart 4 below)

Chart 4: Ardova's Leverage Ratio Q3 2019- Q3 2020

Source: Ardova Financial Statement, Proshare Research

Current Ratio

The company's current ratio increased from 1.22 in Q2 2020 to 1.23 in Q3 2020. Ardova's current asset in Q3 2020 was higher than its current liability showing that it held onto a positive working capital position which suggests that the company can cover its short-term liabilities but could have done better with a ratio of between 2 and 2.5.

Chart 4: Ardova's Current Ratio Q3 2019- Q3 2020

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Source: Ardova Financial Statement, Proshare Research

Acid Test Ratio

The acid-test ratio for Ardova in Q3 2020 stood at -0.67% as against -0.62% posted in Q2 2020, this is steady negative growth from Q1 2020. The tougher working capital ratio (acid-test ratio) being much lower than the current ratio suggests high dependence on inventory- the highest being White Products with N5.69b which the company may need to reverse as the economy picks up in 2021, the company's heavy dependence on inventory is because it is a major player in the downstream sector as a petroleum products marketing company i.e Fuels, Lubricants, and LPG. The growth of the company's inventory may need to fall to ensure adequate future operational liquidity. (see chart 5).

Chart: Ardova's Acid Test Ratio Q3 2019- Q3 2020

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Source: Ardova Financial Statement, Proshare Research

Eyes on The Future- The Now and There

Taking a cue from Ardova's stellar performance in Q3 2020, the future appears prepped for sustained growth despite challenges induced by the coronavirus pandemic and uncertainty surrounding the international crude oil market as investors and traders skip into the new year 2021. Global oil demand remains shaky as the impact of the COVID-19 pandemic still looms, Nigeria Gross Domestic Product contracted by -3.62% in Q3 2020 with crude petroleum and natural gas sector recording a decline of -13.89%, the company may still face jarring demand realities in Q4 2020 and Q1 2021.

Furthermore, macroeconomic concerns such as the rising costs of goods and services in the country leading to a decline in consumer spending, lower demand for retail petroleum products, high operational costs resulting in lower margins will most likely lead to pressure on the company's liquidity and profitability.