Tuesday,
February 27, 2018 /12:45 PM / Vetiva
· EPS slumps y/y but
still ahead of estimate
· Final dividend of ₦14.00/share takes
total dividend to ₦17.00/share
· Full liberalization
remains biggest upside to earnings
· FY’18 earnings to
normalize, valuation supported by strong cashflow
EPS
Slumps Y/Y But Still Ahead Of Estimate
TOTAL
reported a 46% y/y drop in FY’17 profit after tax to ₦8.0 billion, translating to an EPS of ₦23.62 (FY’16: ₦43.58). However,
considering the challenging operating landscape in the Nigerian petroleum
downstream sector over the course of the year, we find this performance quite
impressive even as the reported EPS beat our ₦18.95 expectation. We recall that FY’16 was a very
strong base year, bloated by the impact of partial liberalization of the
downstream sector (May 2016) and low oil prices on earnings. Notably, the Board
of Directors proposed a final dividend of ₦14.00/share, taking total dividend for the year to ₦17.00 (maintaining the
record year dividend paid in FY’16).
Also,
we highlight the improvement in TOTAL’s cash position in Q4. We note that the
company’s Operating Cash flow has been negative since the start of Q1’17 partly
weighed by high Other Receivables (₦42.3 billion as at 9M’17), a bulk of which are related to claims from
Petroleum Equalization Fund. The receivables however moderated to ₦17.7 billion at the end of
the year – supporting the operating cash flow and reducing dependence on
overdraft facility. Drilling down into the full year line items, most of the
numbers came much in line with expectation.
FY’17
revenue was flat y/y at ₦288 billion (Vetiva: ₦301 billion) following a further 2% q/q decline in Q4 when fuel
shortages were severe. Gross margin for the year printed at 10.2% (Vetiva:
10.0%) amidst margin cap on PMS supply from NNPC, and as strong crude oil
prices in Q4 pressured cost of base oil (main input for Lubricant).
Administrative expenses remained flat q/q to take FY’17 numbers to ₦18.2 billion, just in line
with our expectation. The main driver of the deviation however came from
Selling & Distribution expenses, down 42% y/y to ₦2.7 billion and far from our ₦4.2 billion expectation. We should highlight that the
expense line was reported at ₦2.8 billion as at 9M’17.
Full
Liberalization Remains Biggest Upside To Total Earnings
We
maintain our erstwhile outlook on TOTAL. The company remains well positioned to
maintain its long-standing dominance in the Nigeria downstream petroleum
industry given its fuel distribution network even as it continues to expand its
asset base (FY’17 CAPEX: ₦7.2 billion, FY’16: ₦5.4 billion). Notwithstanding, policy catalyst particularly in form of
full liberalization of the sector is required to extract optimal value from
these assets. With oil prices expected to remain strong in 2018, we expect PMS
landing cost to remain higher than the regulated pump price band of ₦135 - ₦145/litre making it
uneconomical for independent markets to import.
Hence,
we do not foresee deregulation in the sector in the near term even as the 2019
general elections draw nearer. As such, we expect the current status quo in the
sector to be maintained – NNPC to remain the sole importer of PMS, rationing
the supply to marketers at regulated thin margins. With fuel shortages slightly
worse than anticipated thus far in 2018, we cut our FY’18 revenue to ₦300 billion (Previous: ₦313 billion
Fy’18
Earnings To Moderate, Valuation Buoyed By Strong Cashflow
We
expect to see normalizations across a number of line items in TOTAL’s FY’18. As
earlier highlighted, Selling & Distribution came in quite low given
historical trend, current level of sales as well as inflationary pressures
during the year. As a percentage of sales, the expense line printed at 0.9% for
FY’17 vs the average 2.0% in the last five years. We have taken a conservative
stance in estimating the expense line going forward and thus forecast FY’18 at
1.7%.
Also,
Other Income of ₦3.9
billion consists of some items which we do not see as recurring items –
Reversal and re-measurement of FX forward contract (₦1.6 billion), FX gains (₦1.0 billion) and Gains on PPE (₦0.1 billion). After
adjusting for non-recurring income from FX transactions and gains from asset
disposal, we forecast Other Income of ₦2.1 billion for FY’18. Also, we do not expect the ₦1.9 billion from “Forex
differential on Petroleum Subsidy Fund (PSF)” recognized in Q3’17 to re-occur,
hence we exclude this from our forecast going forward. With improving operating
cash flow, we expect the oil marketer to be less dependent on overdraft
financing over the course of the year.