Friday, February 16, 2018 /12:05 PM / CardinalStone
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
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.
Growth in revenue to pick up, albeit
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%.
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.
1. Total Nigeria Plc - Fairly resilient earnings for a tough FY''17
2.TOTAL Declares N8.01bn PAT in 2017 Audited Results, Proposes
N14.00per share Dividend (SP:N228.00k)
3. TOTAL Declares N5.96 bn PAT in Q3 2017 Result, Proposes N3 per share
Interim Dividend (SP:N245.00k)
4. Total Nigeria Plc - Allegation of Indebtedness
5. TOTAL Declares N4.61 bn PAT in Q2 2017 Result;(SP:N270.00k)
6. Total Nigeria Plc - Moving from Underperform to Neutral Rating
7. TOTAL declares N14.80billion PAT in 2016 Audited
8. Total Nigeria Plc Issues Notice of Board Meeting
9. TOTAL Declares N11.63 bn PAT in Q3 2016 Result, Proposes N7 per
share Interim Dividend (SP:N290.00k)