Oando Plc. (12 months ended December 2013, 3 months ended March 2014 and 6 months ended June 2014)
- Oando Plc “Oando” released its long awaited FY 13 audited financials as well as Q1 14 and H1 14 unaudited results. Oando has proposed a dividend of N0.30k for FY 13—in line with our expectation—and implies a dividend yield of 1.2%. Furthermore, the company proposed—for the first time—an interim dividend of N0.70k for H1 14.
- In contrast to other results released in 2013, reported FY 13 financials excludes discontinued operations—Oando Exploration & Production Limited (OEPL) and East Horizon Gas Company (EHGC)—which have been sold and thus renders quarterly evaluation of results difficult. Accordingly, we review cumulative results for 2013.
Topline weakness persists on lower downstream throughput
- FY 13 revenues fell 30% YoY to N449.8 billion still reflecting the scale back of volumes at Oando’s downstream division, particularly the Oando Supply Trading segment where reported FY 13 sales (N167 billion) is about half of FY 12 numbers. Revenue from upstream subsidiary OER dipped 5% YoY on the back of lower net realizable price of $87.32/bbl in 2013 vs. $91.20/bbl in 2012 as average production volumes remainedflat at ~4kbpd. On the other hand, sales from Gas & Power division declined 30% YoY to N24.8 billion largely as a result of exclusion of contributions from EHGC.
- FY 13 COGS contracted a quicker 32% YoY to N390 billion, with gross profit dropping 15% YoY to N59.2 billion. However, largely reflecting lower contribution from downstream business—OST gross margin averaged ~2% in the last 2 years—GM expanded 240bps YoY to 13%.
- Operating expenses rose a modest 1.6% to N47.8 billion as a 5% YoY increase in administrative expenses to N41.4 billion—on the back of higher depreciation particularly from its upstream assets—offset the 14% YoY decline in selling and distribution expenses to N5.5 billion. Furthermore, despite a 3 fold YoY increase in other operating income to N5.1 billion—bolstered by profit of N2.8 billion from sale of OEPL—EBIT fell 32% YoY to N16.5 billion, with related margins contracting 8bps to 3.7%, 170bps below 5 year average.
Spike in finance charges crimp earnings
- Largely reflecting interest charges linked to deposit for the COP acquisition, net finance charges rose 55% YoY to N15.8 billion and caused PBT to plunge 96% YoY to N713 million. Taxes of N5.4 billion resulted in loss-after-tax of N4.7 billion from continuing operations. However, Oando reported profit of N6.1 billion from discontinued operations—OEPL and EHGC—which imply FY 13 PAT of N1.39 billion.
Weak start to 2014 as topline dips further
- In line with recent trends over the past 4 quarters, Q1 14 revenues declined 30% YoY to N85.3 billion. We believe sales remain negatively impacted by lower contribution from downstream division and offset the impact of 22% YoY recovery in crude oil production to 4.5kbpd. Nonetheless, we note that released results do not restate 2013 figures to reflect impact of discontinued operations to ensure like-for-like comparison.
Higher finance charges following delayed approval of COP deal extends pattern of losses
- Mirroring FY 13 patterns, Q1 14 COGS fell a faster 34% YoY to N70 billion resulting in a 10.8% YoY increase in gross profit to N14.5 billion, with related margins expanding 620bps YoY to 17%. We believe gross margin gains continue to reflect decreased contribution from OST, amidst increased contribution from the high margin upstream segment on driven by rebound in volumes.
- However, a 30% YoY increase in Q1 14 operating expenses to N10.8 billion—largely driven by the 17% YoY rise in administrative expenses to N9.6 billion—amidst 13% moderation in “other operating income” to N1 billionreversed gross profit trends with EBIT declining 20% YoY to N4.6 billion. Nonetheless, reflecting net impact of gross margin expansion, EBIT margins expanded 70bps YoY to 5.5%.
- Following delayed consummation of COP acquisition, Q1 14 net interest expense rose ~26% YoY to N4.7 billion on still elevated borrowings N240 billion, resulting in loss before tax of N59 million. Taxes of N2.6 billion resulted in loss-after-tax of N2.7 billion vs. PAT of N2.4 billion in Q1 13.
Top-line weakness persists….
- On the heels of the 30% YoY decline in revenues in Q1 14, Q2 14 sales dipped 31% YoY to N109 billion as the company neared its transition into a leading indigenous upstream player. Over the period, OER reported 15% YoY decline in revenues from crude oil sales despite a 17% YoY increase in crude volumes to 4.6kbpd implying tamer net realisable price over the periodcontributed to the weak sales.
….but gross margins positively surprise
- However, Q2 14 COGS nearly halved YoY to N73.2 billion, resulting in gross profit more than doubling to N36.0 billion from Q2 13 with corresponding margins expanding 22.2pps to hit record high of 33% (13.1% average over 12 trailing quarters). Whilst the margin gains reflects the combined effect of lower contribution from downstream as well as improved production from Oando’s Ebendo field, we do not believe this entirely explains the jump in GM, especially given that lower net realisable price on crude oil sales in the period. In this light we’ll seek clarification from management to ascertain the driver and sustainability.
Gross margin gains filter through to earnings
- Notwithstanding a 26% YoY rise in Q2 14 operating expenses to N17.2 billion, EBIT jumped five-fold YoY to N19 billion reflecting pass-through from gross profits. Accordingly operating margins expanded 15pts to hit a record high of 17% compared to 5.4% average over the 12 trailing quarters.
- Debt levels remained elevated again on N235 billion resulting in three-fold YoY increase in net finance expense to N6.5 billion. Nonetheless, largely reflecting GM gains, PBT rose nearly seven-fold YoY to N12.6 billion, whilst PAT rising over six-fold YoY to PAT to N11.7 billion—highest in a single quarter.PBT and PAT margins expanded 10pts and 9.6pts to 12% and 11% respectively.
Outlook appears brightened with closure of COP acquisition
- Overall the results affirms our view about adverse impact delayed consummation of the COP acquisition could have on company earnings, a theme more visible with 2013 and Q1 14 performance, but with closure announced on the 31stJuly 2014, Oando’s outlook appears upbeat. The acquisition which registers Oando as the largest indigenous oil and gas exploration & production company in Nigeria, with daily total production of ~39kboe, based on 2013 figures–Seplat’s 29kboe and Heritage 8.6kboe for the same period—marks the end of a costly transition process suggesting improved financial performance in the coming quarters. Indeed, though contribution to top-line from COP is unlikely to fully compensate for cut down in OST volumes, higher margins (COP 2013 GM: ~60%) is likely to more than compensate for the shortfall. However, acquisition related debt of ~$800 million (N128 billion) is likely to cap impact on earnings.
- Oando trades at a current P/E of 42x relative to peer average of Bloomberg Middle East & Africa peer average of 28.6x. Further current price of N25.00 is at a sizeable premium to our last FVE (N12.99). Our estimates are currently under review.