Earnings Update: Product mix inefficiency stretches Total’s limits

Fragility where it matters most: Relatively higher volumes of products notwithstanding,
Total Nigeria Plc’s Q1 2019 revenue bared tepid growth of 2.35%, pitching in at NGN77.42bn (Q1:2018: NGN75.65bn).

More evidently, it was a story of inefficiency in the selection of products to vend. While an extensive retail footprint is expected to drive growth in Premium Motor Spirit (PMS)
sales, a consideration of the current demand and supply dynamics of the downstream sector requires a strategy to drive more volumes of high margin products such as lubricants and aviation fuel.

On the contrary, Total increased petroleum product sales by 111.88%, while lubricant sales
waned by a substantial 70.47%. For context, the company vended 4.77 times more petroleum products than it did lubricants in Q1:2019 (vs. 0.66 times in Q1:2018). To make matters worse, petroleum product sales inclined more towards the General Trade (Corporate Sales) segment which is notorious for weaker margins, with the Network (retail) segment posting a 2.17% y-o-y deterioration.

Our outlook on the company’s top-line has been moderated downwards, though
we envisage an expansion of the lubricant segment in succeeding quarters, causing FY:2019 expected revenue growth to settle at 7.50% (NGN331.09bn).

Costs remain obstinate in the face of industry headwinds: In Q1:2019, direct costs outpaced revenue growth, contributing to a softer gross margin. With average oil price lower by 5.06% compared to the same period last year, landing costs were expected to taper down but remained relatively flat due to higher global freight costs. Consequently, Cost-to-Sales surged to 89.49% (vs. 88.99% in Q1:2018) while gross margin deteriorated to 10.51% (vs. 11.01% in Q1:2018).

Operating expenses corroborated the broad story of stubbornly elevated costs, as they soared by 25.62% due to a 27.18% uptick in administrative expenses and a 17.08% rise in depreciation charges. Notably, Foreign Exchange Losses (classified as “Other Expenses”) also snowballed.

On the back of these, total operating expenses settled at NGN7.17bn (vs. NGN5.70 in Q1:2018) and operating profit dipped by 57.49% to NGN1.38bn from NGN3.24bn in Q1:2018. Finance costs ballooned to NGN1.91bn, a 178.61% rise that triggered a loss before tax and net loss of NGN0.42bn and to NGN0.47bn respectively. This return is the worst since Q4:2010 and continued a trend which began in Q4:2018 where net earnings were only NGN0.30bn.

Operating Accruals reflect poorer earnings quality: Sales to the general trade segment
(Corporate Clients) swelled by 7.54% over the period under review. Traditionally, heightened corporate sales are precursors for an uptick in receivables and Q1:2019 was no different, as trade and other receivables expanded by 31.46% to reach NGN68.37bn (FY:2018: NGN52.01bn).

The operating accruals, the difference between after-tax profit and operating cash flow, was at NGN21.92bn, a suggestion of poorer earnings quality when compared to the FY:2018 figure of – NGN1.57bn.

Outlook and Recommendation: Our outlook on crude oil prices for FY:2019 is now in the
USD60pb – USD70pb range, implying lower landing costs and a boost to NNPC’s importation cum supply efforts. Similarly, a stronger play on volumes of deregulated products and lubricants should ordinarily impact Total’s margins positively. However, we expect that costs will remain stubbornly high, causing FY:2019 earnings to moderate to NGN5.46bn, a 31.46% contraction.

This earnings outlook is premised on a sturdier Q2 performance, as antecedents indicate.
FY:2019 expected EPS is NGN16.07, and with a target PE of 9.35x, we arrived at a target price of NGN150.25, a downside potential of 11.62% to the current share price of NGN170.00.

Source: Nairametrics

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