Total Nigeria Plc - Moving from Underperform to Neutral Rating

Proshare

Wednesday, March 29, 2017/11:46 AM/FBNQuest Research

EPS forecasts up 24% over the 2017-19E period; PT up 19% Total’s full year 2017 PAT of N14.8bn grew 266% y/y on the back of solid topline growth and a gross margin expansion of 498bps y/y to 17%. The company benefitted from shrinking competition in 2016 on the back of fx scarcity.

However, industry dynamics are likely to be different this year given the central bank’s increased ability and willingness to provide fx. We do not expect local refining to have a major impact on products supply.

As such, from Total’s perspective, we anticipate increased competition and lower y/y unit volume sales as a result. We also do not see a significant upward adjustment to gasoline prices given the political backdrop.

We believe the government is likely to carry on with its selected pricing mechanism for as long as it is possible. Overall, we believe that Total’s 2016 performance will not be repeated this year.

We forecast an earnings decline of -41% for 2017E. We expect the impact of the increased fx supply (hence higher products supply) to weigh on H2 2017 in particular.

Notwithstanding, we have raised our EPS forecasts over the 2017-19E period by 24%. Our new price target of N250 is higher by 19% and implies a potential downside of -4% from current levels. Year-to-date, Total shares are down -13%, underperforming the market by 8%, primarily driven by profit taking and a disappointing final dividend proposal of N7.00.

We have upgraded our rating on the stock to Neutral from Underperform. The shares are currently trading on a 2017E P/E multiple of 10.1x for EPS decline of - 13% in 2018E.

Q4 2016 PBT and PAT both up significantly y/y In Q4 2016, while sales grew 45% y/y, PBT and PAT were both up strongly, by 116% y/y and 148% y/y, with sales from service stations accounting for around 75% of group sales.

A gross margin expansion of 1,171bps y/y to 24.2% and a 47% y/y reduction in net finance charges led to the strong y/y PBT growth and offsetting a –N15bn fx revaluation loss.

PAT growth came in much stronger due to a lower tax rate of 6% vs. 18% in Q4 2015. Compared with our estimates, while Q4 sales and PBT were behind by 6% and 9% respectively, PAT was ahead by 42% due to a positive surprise on the tax line.

Total declared a final dividend of N7.00 (total dividend of N17.00) which works out to a dividend payout of just 39%, the lowest on record.






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