Wednesday, August 14, 2019 / 03:00PM / Meristem Research / Header Image Credit: Total Nigeria Plc
Revenue Concerns Show No Signs of Letting Up
Revenues for Nigeria’s largest downstream player took a further hit in Q2:2019, dragging half-year performance to an abysmal close. Sales of Petroleum products declined by NGN4.11bn (6.41%), while Lubricant trading expanded by only NGN91.50mn (+0.68%). On the back of these, the company witnessed negative Q-o-Q revenue growth of 5.18% from NGN77.42bn to NGN73.40bn. For the quarter, Revenue across TOTAL’s three segments; Network, General Trade and Aviation either remained flat (+0.47%) or weakened considerably (-25.19% and -25.52% respectively). Overall, half-year topline performance came in 3.48% lower at NGN150.83bn.
We reiterate that TOTAL’s woes are not peculiar, as the entire downstream segment had to deal with depot owners’ agitations for better margins, triggering higher unofficial prices for PMS. Inventory levels therefore saw a 37.37% uptick Y-o-Y, as the company preferred to store products than vend. The elephant in the room for the second half of 2019 is a discussion about a possible hike in Official Selling Price of PMS. Nonetheless, we have significantly moderated our outlook on 2019FY revenue to a measly 0.12% (NGN308.35bn) even though we envisage further expansion in the lubricant segment.
Finance Costs Pressure Bottom-Line
Gross margin softened in H1:2019, after a first quarter of unwieldy direct costs. Cost-to-Sales (CtS) declined at a much slower pace than revenue, as landing costs remained on the high, given higher freight costs and the demand for better margins by depot owners. Therefore, CtS surged to 88.91% (vs. 86.41% in H1:2018), dragging gross margin to 11.09% (vs. 13.59% in H1:2018). Operating expenses were not left out of the story, as they soared by 16.89% owing largely to a 21.16% uptick in administrative expenses. Overall, OPEX settled at NGN13.86bn while operating profit declined by a whopping 61.31% to NGN3.94bn from NGN10.18bn in H1:2018.
Finance costs for the half year also surged by 133.30% to NGN3.95bn on the back of a 53.47% increase in Borrowings – majorly bank overdrafts taken by the Network segment. Pre-tax profit settled at NGN0.20bn (H12018: NGN8.65bn) after a NGN0.62 gain in Q2. Net Income also trended 97.71% lower, coming in at NGN0.13bn (EPS: NGN0.38 vs. NGN16.71 previously).
Further Worry About Operating Conditions
During the half-year period, TOTAL recorded negative Operating Cashflow of NGN14.20bn, with NGN11.43bn of this accounted for by the 37.79% surge in inventories which were financed largely by overdrafts. When benchmarked against the paltry NGN0.13bn profit earned during the period, there is evidence of further deterioration in earnings quality.
Outlook and Recommendation
TOTAL’s results reflected more of the same story we told in Q1:2019, although with a minor improvement in fortunes. Provided that the company applies its network strength to push out volumes in H2 and sustains costs at current levels, it should be able to turn a decent profit by year end. While we have significantly cut earnings expectation to NGN1.85bn, lower -76.81% Yo-Y, we do not expect that the many institutional investors who hold the counter would realize their losses before year end. 2019FY expected EPS is now deeply discounted to NGN5.44, and with a target PE of 20.50x, we arrived at a target price of NGN111.46 (vs. NGN150.25 previously), a downside potential of 2.91% to the current share price of NGN114.80 and a HOLD.