Eterna Plc FY 2020 Report: Falling Revenue with Forced Profit

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Monday, April 62, 2021, 10:00 AM / by Tosin Ige, Proshare Research/ Header Image Credit: Eterna Oil Plc



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Downstream oil & gas company, Eterna Oil Plc started 2020 with a win in its case against the Economic and Financial Crimes Commission (EFCC) on alleged fuel subsidy fraud, nevertheless, like most companies in the downstream oil and gas market, the retailer faced sizeable COVID-19-induced headwinds.

 

 The company saw a major drop in its gross revenue by -74.39% year-on-year (Y-o-Y) from N229.27bn in 2019 to N58.72bn in 2020. Another sore point for Eterna Oil Plc was its huge foreign exchange losses that settled at N354m in 2020 down from a gain of N33m in 2019. Nevertheless, the group squeezed out some earnings growth by slicing down operating costs and deferring a large proportion of its taxes.

 

Key Highlights

  • The group's total revenue in 2020 fell by -74.39% Y-o-Y from N229.27bn in 2019 to N58.72bn in 2020.
  • The company's cost of sales (COS) dipped by -76.28% Y-on-Y from N224.32bn in 2019 to N53.21bn in 2020.
  • Eterna Oil's gross profit for 2020 increased to N5.51bn from N4.95bn in 2019, representing a growth of +11.27% Y-o-Y.
  • The operating profit grew by +12.90% Y-o-Y from N1.34bn in 2019 to N1.54bn in 2020.
  • The group's finance cost fell by -31.67% Y-o-Y from N1.49bn in 2019 to N1.02bn in 2020.
  • Profit before tax (PBT) increased by +391.88% Y-o-Y from N111.44m in 2019 to N548.15m in 2020.
  • The group's taxation also decreased by -253.64% Y-o-Y from N255.73m in 2019 to (N392.90m) in 2020.
  • Eterna's profit after tax (PAT) rose notably by +752.19% Y-o-Y to N941.06m in 2020 from N144.29m in 2019.
  • Total assets rose by +25.35% Y-o-Y from its N28.533bn in 2019 to N35.77bn in 2020.
  • The group's total equity climbed up by +7.58% Y-o-Y in 2020.
  • Earnings per share rose from a negative value in 2019 by +754.55% Y-o-Y to 0.72 in 2020. A surprising repair of earnings during a COVID headwind.


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Share Price & Volume Movement- Wavering Sentiment

Eterna's share price had a tidal-wave trend between December 2019 and the end of Q1 2021.  The share price saw a downward trend at the beginning of 2020. The price picked up slightly at the end of Q1 2020, dipped again in April ending and increased relatively in the following month. Over these periods, the share price maintained quite low levels given the uncertainty created by the pandemic. This trend continued towards the end of Q3 when it saw a historical low price of N1.90 year-to-date on 31st August 2020, before increasing to a relatively high in October 2020 attributed to the positive sentiment about the business environment as lock downs were eased in major sectors and calmness returned to major cities after the youth protests against alleged police brutality. Momentum on the likely resurgence of the virus again drove down the price in November 2020 but it recovered to its N4 to N5 range in Q4 2020 to the end of Q1 2021 as investors continued to hope for a better future.

 

In terms of volume, Eterna had many periods of high trading volumes against few periods of low trades. The volume traded low in December 2019 but increased sharply in January and followed a downward trend to March 2020 as investors were uncertain of the company's future earning given the intensity of the pandemic within the period. The volume rose again as lock downs were relaxed but dipped significantly in August 2020 and maintained upward volumes through the rest of the year except in November ending when it fell drastically again, following the sharp increase in the share price in previous months. The company share has been trading low since the wake of the new year 2021 (see chart 1 below).

 

Chart 1: Eterna Share Price Movement Vs Volume of Shares

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*share price and volume as of 31 March 2021

Source: NSE, Proshare Research

 


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Revenue and Profit: Back to Base

Eterna's total revenue fell significantly to the lowest in six years by -74.39% Y-o-Y from N229.27bn in 2019 to N58.72bn in 2020 due partly to decline in sales and partly due to changes in revenue reporting in 2020 (see chart 2 below). A breakdown of the 2020 revenue showed that the Group derived 85% of its revenue from retail and industrial fuels up from 24% in 2019; 13% from lubricants and petrochemical up from 4% in 2019; and 2% from trading activities down from 72% in 2019. The group restructure its revenue composition through the amendment of contracts for trading activities (bulk importation and direct sales to customer facilities) which made it an agent in the transaction, recording only premium and commission on its transactions. This brought down the share of trading activities in its revenue by -97.22% Y-o-Y in 2020.

 

Chart 2: Eterna Total Revenue 2015-2020 (N'bn)

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Source: Eterna Financial Statement, Proshare Research

 

The group's profit before tax rose by +391.88% Y-o-Y from N111.44m in 2019 to N548.15m in 2020 but was lower than the group's profit before tax in years before 2019 (see chart 3 below). The increase in PBT was driven by large falls in finance income and finance cost. Specifically, finance income dipped by -87.72% Y-o-Y from N239.10m in 2019 to N29.37m in 2020 due to declines in interest income on short- dated deposits. Finance cost also dipped by -31.67% Y-o-Y to N1.02bn in 2020 from N1.49bn in 2019 due mainly to the drop in interest on long-term financing.

 

Chart 3: Eterna Profit Before Taxation 2015-2020 (N'bn)

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Source: Eterna Financial Statement, Proshare Research



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Activity Ratios: Moderating Weakness

Eterna Plc has been able to maintain a modest current ratio over the last half decade although downward facing (see chart 4 below). The current ratio of the group fell marginally by -7.02% Y-on-Y from 1.14 in 2019 to 1.06 in 2020. The implication was that the company had maintained a relatively stable short-term solvency. The company may need to keep higher working capital.

 

Chart 4: Eterna Current Ratio 2015-2020

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Source: Eterna Financial Statement, Proshare Research


The group's acid test ratio showed a decline in the last six years, reaching a period low in 2020. The acid test ratio declined by -5.26% Y-on-Y from 0.76 in 2019 to 0.72 in 2020 which was associated with a +30.26% Y-on-Y increase in stock of inventories from N5.30bn in 2019 to N6.90bn in 2020. This sort of increase in inventory has significant implication on the Group's ability to meet its short-term liabilities (see chart 5 below).

 

Chart 5: Eterna Acid-Test Ratio 2015-2020

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Source: Eterna Financial Statement, Proshare Research

 

While the group's liquidity position has recorded a downward twist from 2016, it recorded a reversal in 2020 by +30.67% Y-on-Y to 6.05% from 4.63% in 2019 (see chart 6 below). The increase in the group's liquidity in 2020 was buoyed by increase in liquid assets such as prepayment as well as cash and cash equivalents. However, the low values of the liquidity ratios overtime shows that the Group may be having problem managing its liquidity which is consistent with its acid test ratio analysis.

 

Chart 6: Eterna Liquidity Ratio 2015-2020 (%)

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Source: Eterna Financial Statement, Proshare Research

 

The leverage ratio, a measure of how much capital is in form of borrowing, showed that the group's debt to equity stood at 93.63% in 2020 up from the 72.79% in 2019. The surge in the ratio was driven by the +38.39% Y-on-Y increase in total debt to N12.50bn in 2020 from N9.03bn in 2019 (see chart 7 below). To boost its operational efficiency, the Group necessarily need to engage in cost cutting strategies that will pull down its rate of borrowing.

 

Chart 7: Eterna Leverage Ratio 2015-2020 (%)

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Source: Eterna Financial Statement, Proshare Research

 

Industry-wise, analysts expected the downstream oil and gas subsectors to have greater effects of the COVID-19 pandemic on their revenue flow than their upstream counterparts. However, analysis of the 2020 FY revenue of upstream and downstream oil companies reveals that the pandemic affects their earnings alike though in varying degrees. Surprisingly, one downstream oil company (Ardova Plc) recorded an increase in revenue while the others recorded double digits percent decline in revenue. The severity of the pandemic is felt more by Eterna Plc. The pandemic impacted significantly on Eterna Oil's revenue in 2020 a decline of about -74% Y-o-Y, the largest decline across the audited reports of companies listed on the Nigeria Exchange (NGX) year-to-date (YTD) (see illustration 1 below).

 

Illustration 1 2020 FY Revenue of Audited Oil and Gas Companies YTD

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Outlook

The main concern for the 2020 FY performance and outlook for 2021 of Eterna Plc is that the company declared its profit for the year without consideration for taxes. A breakdown of the PAT showed that the company had a tax credit of 27% of PBT in the year yet it further deferred 101.32% of its total tax expenses (which is about N392.90m) for the year. The size of the deferred tax indicates that the company has accumulated deferred taxes for some years. However, the historical performance of the company shows it has always a capacity of bouncing back after a period of accumulated tax liabilities. Nonetheless, the reported decline in earnings could still throw chilled water over investors’ enthusiasm.



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