Total Nigeria Plc. (12 months ended December 2014)
- Total Nigeria Plc (Total) reported 1.1% YoY rise in FY 2014 revenues to N240.6 billion, with higher COGS and finance charges dragging PBT 20% lower to N5.6 billion. However lower effective taxes of 20% (FY 13: 34.3%) boosted EPS which rose 6.3% to N13.03k, relative to 2013 pro-forma numbers.
- Total proposed a final dividend of N9.00—which in addition to N2.00 interim—brings 2014 dividend payment to N11.00 per share, at par with 2013, but implies a higher payout ratio of 84% (2013: 70%).
Q4 14 topline performance underscores Total’s strategy
- In contrast to our bearish expectations for a 10% contraction, Total’s Q4 14 revenues fell only a modest 1.6% YoY to N62.8 billion. Given the extension of Q3 14 product shortages into the final quarter, and the high base in Q4 13, topline growth which implies 10% QoQ rebound, is quite impressive. Importantly, this compares much more favourably to Mobil’s 1.2% QoQ growth, and suggests Total continues to aggressively pursue its volume driven strategy to retain market share, which was 10% as at 2014 based on our estimate.
- Input cost fell a quicker 4.2% YoY to N55.7 billion, with gross profits accelerating 24% YoY to N7.2 billion, 4% ahead of the forecast. The YoY upswing in gross profit is underpinned by base effects as significant challenges with product sourcing as well as accounting reclassification pushed COGS to record highs, with corresponding record low gross margins of 9% in Q4 13. Thus, while Q4 14 GM expanded 240 bps YoY to 11.4%, it remains flat QoQ suggesting (against our expectation of easing pressures) that Q3 14 cost pressures persisted, a theme also visible with Mobil’s 330bps QoQ contraction in Q4 14 GM.
Higher opex and finance charges crimp profits
- However, a 35% YoY jump in operating expenses erased gains, with profits from core operations falling about 4% YoY to N1.6 billion. Furthermore, Total’s profitability in the period was worsened by the combination of 19% YoY dip in other income to N556 million and 48% YoY increase in finance charges to N780 million, due to jump in average borrowing to N19 billion (Q4 13: N15 billion). Thus, though PBT fell 25% to N1.3 billion, relative to proforma Q4 13, QoQ it jumped 88%, coming~6% ahead of our estimate. Bottom-line was however boosted by a tax credit of N423 million, with Q4 14 PAT up 50% YoY to N1.7 billion, running 70% ahead of our expectation. In the same vein, Q4 14 PBT margin contracted 70bps YoY to 2.2%, while PAT margin expanded 100bps to 2.8% (Q4 14E: 1.8%).
Total’s strategy to face hurdles over 2015
- Overall, despite weak YoY performance, QoQ recovery suggests despite sector challenges, volumes growth over Q4 14 filtered into bottom-line. Going forward, we expect Total to continue to pursue this strategy. In this regard, a number of recent development hint at a more challenging year over 2015 which could limit impact on bottomline. Specifically, combined with the softer input cost on diesel and lubricants, fixed absolute margin on PMS should see the recent cutback in price translate into a net gain for gross margins. Nevertheless, our estimate show that higher operating expenses, but more importantly, spike in finance charges, as devaluation drives debt higher and higher interest environment, are likely erode GM gains and ultimately moderate profitability. Whilst current fiscal challenges increase the prospect for post-election deregulation, which we believe could significantly positively alter the company outlook. Nonetheless, after several failed removal attempts, we have excluded the possibility from our projection.
Buy, sell or hold
- Overlaying the tepid earnings outlook, with an increase in risk free rate to capture upswing in sovereign yields drives a sizeable moderation (-27%) in FVE to N130.15. While share price has retraced about 9% since our last update, current share price is at a 16% premium to our FVE. Total trades on 2015E P/E of 15x which is at a premium to Bloomberg domestic peer average of 7.7x.
- We downgrade our rating on the stock to a SELL from NEUTRAL.
Source: ARM Research