Analysis of Mobil Oil Nigeria Plc. (12 months ended December 2014)
- Mobil Oil Nigeria Plc “Mobil” reported 1.1% YoY rise in FY 14 revenues to N79.5 billion. Reflecting impact of property sale in Q1 14, FY 14 PBT jumped 65% YoY to N8.4 billion, with lower effective taxes pushing FY 14 EPS 84% higher YoY to N17.73k.
- Despite the strong earnings, management proposed a dividend of N6.60k per share (+10% YoY), which implies a 37% payout ratio (FY 13: 62%) and 4.5% dividend yield as at yesterday’s closing price.
Lower gasoline volumes weigh on topline
- After recording 6% YoY decline in Q3 14, Mobil’s revenue dipped by a similar margin in Q4 14 to N18.9 billion, pressured by weak gasoline throughput over the quarter. We had expected an increase in motorway miles during the dry season to support volumes, but with revenues falling 10% shy of our estimate, it appears management trimmed PMS exposure on concerns of outstanding subsidy payments as well as higher depot prices which crimps the already thin margins.
- Likely reflecting the relatively higher depot prices for gasoline, input costs fell a slower 4.5% YoY to N16.6 billion resulting in a steep decline (-12% YoY to N2.3 billion) in gross profits, with corresponding margins contracting to 90bps YoY to 12.1% (lowest in 7 quarters) vs. our estimate of 14.3%. Indeed, the level of GM contraction comes as a surprise, particularly on the heels of drop in oil prices over H2 14.
High opex levels amplify GM softness
- Weakness at the gross levels, permeated into operating profits, with a modest 3.8% YoY increase in operating expenses to N2.1 billion driving a 61% decline in operating profit to N584 million and 4.4pts contraction in related margins to a decade low of 3.1%. Pressures reflects Mobil’s relatively higher operating leverage relative to industry, with opex-sales ratio (~10% in the last decade vs. industry average of 7.5%).
- While “other income” of ~N72 million over Q4 14, moderated net finance charges to N104 million (+26% YoY), weak operating performance permeated to profitability, with PBT and PAT plummeting 59% and 57% YoY to N551 million and N400 million, with similar deviations from our estimates. Respective PBT and PAT margins shrank 380 bps and 250 bps YoY to 2.9% and 2.1%, the lowest since 2012 subsidy saga.
Margin expansion on depressed oil prices to moderate weak topline
- Notwithstanding the deviations to our estimates, weak Q4 14 performance, affirms the pessimism we had expressed on the sustenance of the robust Q3 14 earnings performance in our last update. Looking ahead, the 10% reduction in PMS price combined with flat to lower volume growth—due to heightened apprehension that weak fiscal position could elongate subsidy reimbursement—should exerts downward pressure on topline. That said, soft input cost for deregulated products, particularly lubricants and AGO increases scope for margin expansion. Specifically, base oil prices (a key ingredient for lubes) is ~30% lower, even as Mobil’s current retail price for AGO remains at a healthy ~13% premium to recommended sell price based on PPPRA’s pricing template, even after adjusting for naira devaluation. By our estimates, the foregoing should drive profitability higher over 2015. Nevertheless, an increase in risk free rate to capture upswing in sovereign yields offsets impact on valuations and drives our FVE 10% lower to N96.68. Mobil trades at 2015E P/E of 12x a premium to Bloomberg domestic peer average of 7.7x and justified forward P/E of 5.6x. We retain our SELL rating on Mobil.