Total Nigeria rated NEUTRAL after Q2 2015 results by FBNC

Proshare

Tuesday, July 28, 2015 8:52 AM / FBN Capital Research

 
Event: Total Nigeria (Total) reports Q2 2015 results

Implications: Upward adjustments to consensus full year estimates expected

Positives: Strong other operating income line, up significantly both y/y and q/q

Negatives: Q2 sales declined 13% y/y and 14% q/q respectively


Late yesterday, Total reported Q2 2015 results which showed that although sales declined 13% y/y, both PBT and PAT were up 79% y/y and 57% y/y respectively. The topline decline in Q2 is not surprising given the persistent petroleum product scarcity in Nigeria. Although the federal government (FG) announced a partial settlement of outstanding subsidies to marketers in May, the extent of the growth on the other operating income line is quite surprising and is well above our expectations. Management had guided modestly. Other operating income was up 4x y/y to more than offset the topline decline and a modest y/y growth in operating expenses, leading to a PBT growth of 79% y/y. A slight gross margin expansion of 65bps y/y also helped.

According to FG announcements in Q2, subsidy reimbursements were made towards interest rate and fx differentials. Given a normal quarterly average run rate of N400/450m for Total’s other operating income line, subsidy reimbursements were likely around N2bn in Q2 alone. Sequentially, we observe a similar q/q trend as sales declined by 14% q/q while both PBT and PAT came in stronger on a q/q basis. Again, other operating income which was up significantly q/q was the primary driver. However, we also note that Q1 2015 was particularly weak.

 
Compared with our estimates, while sales missed our N57.8bn forecast by 10%, PBT and PAT came in well ahead our estimates. The positive surprise on the other income line was the sole driver for the variance.  

Consensus sales and PBT forecasts for 2015 are N234.9bn and N5.7bn respectively. As such, we expect upward adjustments to anaylsts’ estimates on the back of these numbers. Going forward into H2, we believe the topline is likely to remain soft given the unrelenting petroleum product shortage in the country. Following recent statements by the government, we now believe the removal of subsidies is unlikely in 2015 as the government is prepared to fully evaluate the social & economic impact that a full deregulation of the downstream sector might have on the country. Our channel checks reveal that the FG still owes marketers around N200bn (US$1bn) in subsidies. As such, most marketers are likely to continue to stay on the sidelines given unclear policy signals by the new administration and the FG’s poor fiscal condition. This effectively suggests that the Nigerian National Petroleum Corporation (NNPC), which accounts for around 40% of the total gasoline market in Nigeria, is likely to remain the primary importer through H2 2015. We continue to monitor Total’s budding non-core businesses.


At current levels, on our published estimates, Total shares are trading on a 2015E P/E multiple of 15.6x for 15% EPS growth in 2016E. Year to date, Total shares have gained 13.7%, outperforming both the oil & gas index and NSE ASI by 16.5% and 24.8% respectively.

Total Nigeria Q2 2015 results: actual vs. FBN Capital Research estimates (N millions)

We rate the stock Neutral.  Our estimates are under review.


Recommendations and movements in price target



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