Total 2015 Q1 Results
Surge in PMS volumes offset lower prices…
- Total Nigeria Plc “Total”released Q1 15 results wherein revenues were marginally lower (-0.9% YoY) at N60 billion but 8% ahead of our estimate, as 11% YoY increase in sales from its network segment was offset by declines in other segments (general trade: -21% YoY and aviation: -25% YoY). The upswing in revenues from its network segment, despite the 10% reduction in retail price of PMS, implies Total aggressively pushed gasoline volumes, which we estimate rose ~20% YoY. What is apparent to us from foregoing is that Total continues to guard its ~11% market share (our estimate), despite sector wide challenges.
…but drives GM to lowest in 6 quarters
- Preservation of market share in the face of product shortagesimplies sourcing products from third parties (and typically) at a premium to ex-depot price. This was evident in Total’s input costs which stayed flat YoY at N53.5 billion, tracking 9.7% ahead of our estimate, as higher petrol sales offset gains from softer oil prices. Consequently, gross profit dropped ~8% YoY to N6.5 billion—5% shy of our estimate—with related margins shrinking to the lowest since Q4 13 (~80bps YoY to 10.9%), relative to 12.4% implied in our forecast.
- Operating cost rose 14.2% YoY to N5.7 billion underpinned by increases in both components. Reflecting higher volumes,S&D rose 17.8% YoY to N1.3 billion, whilst a hike in salaries and additional business promotion expenses—in relation to the rebranding exercise commenced about 3 years ago—pushed administrativecosts 13% higher YoY to N4.4 billion. Consequently, earnings from Total’s core operations plunged ~60% YoY to N820 million, though the increase in other operating income (+6.6% YoY) pared declines in EBIT to a 55.8% YoY at N910 million—but only about half of our estimate. Operating margins of 1.5%, which are the lowest in nearly a decade is short of Q1 14 (3.6%) and our Q1 15E (3.1%).
Tax spike exacerbates earnings woes
- Aided by 40% YoY jump in finance income—likely due to improved cash management—and modest decline (-3%YoY) in finance charges, net finance expense fell 18.9% YoY to N284 million. Given relatively tighter interest rate environment we had anticipated much higher finance charges of N526 million, but Total reported only a 150bps (vs. our 300bps expected) hike in annualized average interest to 15.4%. In all, largely reflecting weaker GM and higher operating cost, PBT fell 63%YoY to N626 million, with higher effective tax rate of 64.6% (vs. 32%) on the back of reconciliation of deferred tax liabilities—driving PAT 80% lower YoY to N223 million, 80% short of estimate. PBT and PAT margins shrank 180bps and 140bps YoY to hit record lows of 1% and 0.4%, respectively.
Deteriorating outlook weighs on valuation
- In our view, Total’s markedly weak Q1 15 results is off the back of the company’s strive to retain market share in a regulated market dogged by delayed subsidy reimbursement. Whilst we did not anticipate this level of pressure on earnings, it nonetheless fits our view that this strategy could have negative implications for Total’sbottomline. Nevertheless, we see little scope for deviation from this strategy, particularly as management continueto diversify earnings streams with other initiatives,including Awango lamps and partnership with KFC and Etisalat, which are yet to have any meaningful impact on earnings. Given the tenacity with which Total continuesto pursue this strategy, we revise our 2015E revenue 5% higher from previous to N235 billion. The volume push and implied reliance on third party throughput leads us to lower 2015 GM to 12.0% (vs. 12.9% previously), and by 40bps over our forecast horizon to 12.2%. Whilst we expect improvement in cash management to temper pressures from interest expense, the gross margin compression and higher opex assumptions result in our 2015E EPS 25% lower than previous. We maintain that deregulation of the downstream sector could alter positively the company’s prospects, and though the possibility now appears nearer that prior, we continue to exclude impact from our projections. Cumulative effect of our revisions drive our FVE 15% lower from prior to N115.54, with last trading price at a 40% premium. Total is trading 3.9x its current book value and 16.9x 2015E earnings, both at premium (to peer averages of 1.9x and 10.6x respectively) which are hard to justify in view of tepid earnings growth outlook.
- We retain our SELL rating on the stock.
- Source ARM
Disclosure – This article was culled from ARM Research newsletter and was not solely written for Nairametrics. The author of this article wrote it themselves, and did not write this article on behalf of Nairametrics.