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Sunday, May 28, 2023

Earnings Message: Total Nigeria and Ardova Are Back

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Downstream oil and gas businesses were hard hit during the pandemic as low crude oil price meant the pump price of petroleum products dipped even as oil marketing companies were carrying inventories at higher prices.

To exacerbate the already anemic position of operators in the industry was the decision of the Nigerian National Petroleum Corporation (NNPC) to be the sole importer of the premium motor spirit (PMS) even after there were claims that the industry had been deregulated and liberalised.

Notable, foreign exchange scarcity is hindering oil marketing companies from bringing in PMS into the country, and the product’s cumbersome procurement process, with its attendance immediate cash settlement policy for coastal and inland purchases, favours the state enterprise, but disadvantageous to independent markets because it erodes net working capital and cash balances.

Despite these challenges, Total Nigeria Plc and Ardova Nigeria Plc are doing well as they recorded stellar performances in the first quarter, beating analysts estimates.

Analysts at Cordros Securities have Buy ratings on Total Nigeria and Ardova Plc with target prices of N165.80 and N27.79, with long term view of industry growth and share appreciation.

Total Nigeria returned to the path of growth as it posted net income of 2.97 billion as at March 2020, from a loss position of N163.22 million the previous year.

It is making money from core operations, while turning each Naira invested in sales into higher profit. Gross profit margin increased to 17.22 percent in March 2021 from 11.33 percent the previous year. Earnings before interest and taxation (EBIT) margin moved to 6.73 percent in the period under review from 1.34 percent.

The downstream oil and gas giant have surmounted the subsidy woes as it has the earnings to pay interest expenses. Its operating profit of N4.49 billion is 25.34 times finance costs.

Analysts at Cordros Securities expect Total Nigeria’s revenue to recover from 2020’s 10-yer dip, as economic activities return to pre-pandemic levels. They expect revenue growth of 8.10 percent from 2021 to 2025, and an increase of 26.20 percent in the company’s top line.

“Our growth estimate for revenue is driven mainly by the sale of petroleum products, which has historically been the highest contributor to TOTAL’s revenue. We expect petroleum product sales to grow by a CAGR of 8.8 percent from 2021E to 2025E,” said analysts at Cordros Securities.

“Petroleum products are expected to contribute an average of 82.2 percdnt to total revenue across the next five years, while lubricants and others make up the remaining 17.8 percent,” said the analysts.

Interestingly, Total Nigeria has been rewarding shareholders from distributable profit for over a decade, even amid two economic recessions, which means it has an aggressive dividend policy.

Of course, investors are attracted to the shares of a company that consistently rewards them and the company has a dividend payout of 82 percent over the last 14 years.

Given improved earnings and cash flow generation, it is expected that shareholders will continue to drink Valyrian wine from Westeros, a positive prognosis that wealth of owners will be maximised.

TOTAL currently has the largest share of the pie in the downstream sub- sector.

According to MOMAN market share data, as of H1-20, TOTAL had the largest share across AGO (40.9%) and Lubricants (53.0%), and second-largest market share for PMS (20.0%) and ATK (25.1%).

Ardova Nigeria Plc, “formerly Forte Oil,” is also thriving, as its net margins jumped to 2.04 percent in March 2021 from 0.85 percent the previous year.

The company’s improved margins can be attributed to switching to deregulated margin products like lubricants and LPG, strategic acquisition of outlets, improved revenue from Ghanaian subsidiaries, and increased utilization of power generation business.

From N148.61 billion in 2016, ARDOVA’s revenue grew at a CAGR of 4.1 percent to N181.94 billion in 2020, according to data from Cordros Securities.

According to the research house, the majority of ARDOVA’s revenue in the five years came from fuel sales (PMS, AGO and ATK).

They added that this segment contributed an average of 82.6% of the total revenue recorded in the five years.

With a current ratio of 1.02 times, Ardova is liquid enough to meet its short-term obligations.

Analysts at Cordros Securities have forecast revenue growth of 14.0 percent year on year (y/y) in 2021, as as they expect the company to consolidate on the increased market share in the year following the acquisition of Enyo.

“Going forward, we estimate revenue growth of 9.6% in 2022E and stabilisation at 5%, dependent on ARDOVA’s control of fuels market share and the growth in the other business segments,” said the analysts.

There are indications oil marketing companies will continue to operate on tight margins due to stringent regulations to the government since prices are still non-reflective of market conditions.

However, total liberalization and deregulation of the downstream oil and gas sector will unlock the potentials in the economy, spur competition, and magnify earnings of operators in the industry.

It is also expected that the coming on board of Dangote Refinery this year will ease the burden off the shoulders of a government that is spending copiously in subsidising petroleum products.

With the rally in crude oil price since the gradual reopening of economies and roll-out of vaccines, fuel price is expected to spike on the back of spiraling landing cost, and that means the government will cough up more money to subsidize consumption.

The NNPC has revealed that it will spend over N100 billion on subsidy in April, that is about N2tn a year, a huge amount that ought to have been deployed to bridge infrastructure deficit.

Analysts have said a lot of times that the adoption of a unified foreign exchange policy will subdue currency volatility and pave the way for oil marketing companies to import PMS.

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