Total Nigeria Plc - Policy Shift Key to Full Recovery


Friday, February 16, 2018 /12:05 PM / CardinalStone Research 

Following the release of TOTAL’s FY’17 results, we have reviewed our projections and revised our target price downwards to N232.17. Our target price implies a downside potential of 5.6% to the current market price. Thus, we downgrade our rating to a SELL. 

Lubricant business buoys total earnings in 2017
Total Nigeria Plc released its FY’17 results, reporting a marginal decline of 1.0% in revenue to N288 billion. Despite contributing only 16.5% of total revenues, growth in the lubricant business (+21.9% YoY) moderated the impact of the weaker revenue recorded in the petroleum product business (-5.0% YoY). The poor performance of the petroleum product business reflects the frequent spells of fuel scarcity experienced in 2017 as NNPC struggled to meet demand being the sole importer of the commodity. 

On the other hand, the lubricant business benefited immensely as the company increased production capacity by 33% after adding two (2) filling machines to its plants in Delta and Lagos states respectively during the year. Consequently, Total’s market share in the lubricant space increased by 240bps to 28.17% in 2017.

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Growth in revenue to pick up, albeit marginally
Following the expansion in production capacity and improving consumer spending power, we expect the positive trend in the lubricant business to be sustained in FY’18. This should provide some level of support for top-line against any volatility that may arise in the petroleum business due to intermittent fuel scarcity. 

Consequently, we project a growth of 10% in the lubricant business. For the petroleum business, we anticipate a marginal growth of 5.0% as we believe the government will ensure PMS (Petroleum Motor Spirit) supply is relatively stable particularly as election season draws near. All in, we expect Total’s gross revenue to grow marginally by 7.0% YoY in 2018.

Margins to remain depressed in 2018.
TOTAL’s cost of sales climbed higher by 7.0% YoY to N255.3 billion in FY’17 (FY’16: 32.4% YoY) as naira devaluation and higher crude oil prices adversely impacted fuel landing cost – average fuel landing cost rose by 28.3% from N133.28 in FY’16 to N171 in FY’17. 

Consequently, cost of sales to sales ratio rose by 660bps to 88.6% in FY’17 (FY’16: 82.0). Under the current PMS price regime, we expect the landing cost of PMS to remain significantly higher than the official selling price if crude oil prices remain at current levels. Also, we do not expect the full deregulation of the downstream sector to occur in 2018 being a pre-election. Therefore, we expect the pressure on margins to persist in 2018 hence, we expect gross margin to deteriorate by 60bps to 10.80%.

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Savings in operational expenses may not persist in 2018 
Whilst we noticed an improvement of 20.7% QoQ in operating expenses in Q4’17, we do not expect this to persist in subsequent quarters. This is because most of the cost savings came from transportation and distribution cost which reflects the low business activity due to fuel scarcity in the quarter. Hence, we expect operating margin to remain depressed at 7.6% in FY’18. Overall, we expect bottom-line to further deteriorate by 30.1% to N5.61 billion with ROE and ROA coming in weaker at 19.9% and 4.63% in FY’18. 

Policy Shift key to recovery
We expect the operating landscape to remain tough for TOTAL in the interim pending the full deregulation of the downstream sector. The new PPPRA pricing template has been rendered ineffective by the Naira devaluation and rising crude oil prices. With the landing cost of PMS currently at N166 – a premium of N11 to the official selling price – most major oil marketers (including Total) have found it unprofitable to continue to import the product. 

This defaults the responsibility of fuel importation to the NNPC. More so, owing to the upcoming elections, we believe the government does not have the political will to fully deregulate the price of the PMS.

Hence, we expect the current rigid pricing system to continue to hurt margins and profitability in 2018. No doubt, Total remains positioned to benefit from medium to long term value in the petroleum distribution business given its relatively large distribution network.

However, this will only remain a potential until the sector is fully liberalised. Counter remains overvalued: Given our expectation of a lacklustre performance in 2018 particularly as the government is expected to continue to regulate the pump price of petrol, we have revised our target price downwards to N232.17. This implies a 5.6% downside to current price of N246.00. Thus, we downgrade the counter to a SELL.

Proshare Nigeria Pvt. Ltd.

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