Summary
- They were accused by the FG of being complicit in petroleum subsidy claims
- They only started making profits in 2011 and have posted a profit every year since then.
- Their major products are fuel, lubricants, marine fuel, crude oil. They seem to have diversified out of crude oil trading first half of this year
- Have not been paying dividends in recent years and may just pay dividend this year (in 2015)
- It’s value is bound to almost double if it pays dividends next year.
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Background
Eternal Oil Plc is an Oil and gas company in Nigeria engaged in the upstream and downstream sectors of the industry. They compete with the likes of Oando, Forte Oil, Conoil etc. More recently the company was mired in the subsidy scam that was investigated by the house of reps in 2012. The government withheld subsidy payment to the company as a result thus affecting the company’s ability to discharge its obligations to banks. Their major segments are Retail & Industrial, Lubricants & Chemicals and Trading. Their main products are fuel, lubricants, gas, marine fuel and crude oil.
Results
2013
Eterna Oil reported a 25% drop in profit after tax at the end of its financial year in december 2013. Profit for the year was N703million compared to N946million posted in 2012. It was also significantly smaller than the N1billion posted in 2011. Revenue for the year was N98billion and 9% higher than the N89billion posted in 2012. The profit after tax in relation to the revenues therefore shows the company was only able to make a profit margin of 0.7% in 2013 (2012: 1.1%). This was one of the lowest profit margins in the industry with only MRS Oil posting something similar. The company incurs a very high cost of sale which slices of about 97% of its revenues.
2014
The company reported a 62% drop in revenue in the first half of 2014. Revenue was N13.9billion compared to N47.8billion a year earlier. A closer look reveals the company did not post any revenue this year from Crude Oil Sales which used to make up about 70% of revenue. This suggest it basically concentrated in the downstream sector only earning revenue from Fuel, Lubricants and Marine Fuel. This new direction appeared to have increased pre-tax profits by 48% to N973million (2013 H1: N659million). Profit margin also improved to 7.1% compared to 1.4% same period last year. Return on Equity at 11% is already better than the 10% posted in the whole of 2013.
Valuation
Assumptions
- Dividend will be paid in 2014
- The company will post profits of about N1billion this year
- EPS growth rate for the next five years at a CAGR of −3%
- Discounted the EPS by 20% to arrive at valuation
- Investment horizon is short term
Dividend – Eterna Oil hasn’t paid dividend in recent years and did not pay dividend at the end of 2013. The reason for this was because prior to 2010 the company posted losses and had a negative retained earnings of about N743.5million as at 2011. However, consistent profits since 2010 has reversed the negative retained earnings into a positive N1billion in retained earnings. The company has also reduced its debts from N6.7billion in 2012 to N2.6billion as at June 2014. Debts now make up just 25% of equity which is one of the lowest in the industry. Eterna Oil also has cash of about N711million and I estimate its Ebitda cash flows to about N2.1billion.
This information is very important considering the effect of dividend on a company’s valuation particularly in Nigeria. With its balance sheet now looking healthier it may free up some cash flow that can be returned to shareholders. If it delivers a profit of about N1billion this year, then it is most likely that it could declare a dividend of at least N500million. That will give shareholders a 38kobo dividend and a gross dividend yield of 10% based on its current share price of N3.87. This will most likely push the shares as high as N4.5 (18% upside) if it were to announce such dividends in my view.
DCF Valuation – Using a discount cash flow of the company’s future earnings per share we estimated the intrinsic value of this stock at about N6 which is about 58% higher than the current price. I assumed a negative 3% EPS growth rate over the next 5 years and discounted the EPS by 20% to arrive at this valuation. Eterna Oil was N5 in June 2014.
Finally – Eterna OIl is not a company we consider very sound based on its current operations. It’s margins are historically low and it operates in a highly competitive market. However, the stock has always presented opportunities for bargain hunters to make some profit from capital appreciation. I believe there is an opportunity in here for capital appreciation if the company declares dividends. Anything short of that will see the price depressed even though I believe any price under N6 (based on published results) is undervalued.
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umm . . . well said. no Risk no Fun