Wednesday, August 03, 2016 8:47am /ARM Research
Earnings hit record peak as deregulation buoys margins
Our investment case for Total Nigeria Plc (Total) received another boost with the release of its H1 16 unaudited financials where earnings of
N8.9 billion or EPS of N26.30 (+233% YoY) is more than double our estimate and even exceeds our FY 2016 EPS forecast of N24.80. Also, Q2 16 earnings which jumped four folds YoY to a record N6.0 billion (EPS: N18.00) is more than three times of our estimate.
Total’s strong Q2 16 earnings stemmed from a combination of robust sales of
N85 billion (+60% YoY), tame rise in input costs and benign finance charges (-92% YoY). Pertinently, this outcome fits our prognosis delineated in our note “Flexible PMS pricing: a shot in the arm for petroleum marketers” released following the 67% hike in PMS price to N145/litre.
Unmatched performance guides upward revision to forecast
In view of our optimistic outlook, we have revised our 2016 financial performance forecast for the company and now expect FY 2016 earnings estimate to be 42% higher at
N 15.2 billion (EPS: N44.8).
Sanguine earnings prospect supports unprecedented valuation upside
Net adjustment to our models drive our FVE estimate 60% higher to
N372.98 per share which implies a nearly 86% upside from current price. Furthermore, Total appears cheap on a relative basis, with current and 2016E earnings multiples of 6.2x and 4.5x at sizeable discounts to historical levels (13.6x) and peer average (12.3x). We reiterate our BUY rating on the stock.
In addition to the potential for capital gains, we see scope for attractive dividend yield hinged on our FY 16 earnings expectation. Specifically, we expect a dividend payout of 65%, after adjusting historical payout for additional investments required to compete effectively in the deregulated environment. This implies doubling of final dividend to
N25.30/share and 12.6% yield on current pricing.