“Giving subsidies is a two-edged sword. Once you give it, it’s very hard to take away subsidies. There’s a political cost to taking away subsidies” Najib Razak, current Prime Minister of Malaysia
Nigeria’s struggle to price gasoline appropriately is almost like most other government controlled things – its currency, electricity, natural gas etc. never gets it right. It is worse with gasoline which it ironically has the ability to control due largely to the fact that it produces nearly 2 million barrels per day (bpd) of crude oil and at some point possessed 445,000 bpd of crude oil refining capacity despite only consuming about 300,000 bpd of the product.
The country is dependent on fuel imports for its gasoline needs and has to subsidize to prevent prices from rising too high. Thus, while shipping tonnes of crude to the global oil market daily, it faces recurring problems with fuel scarcity; disputes between fuel marketers and the government. The government is saddled with a burden for fuel subsidies that keeps rising each year. Despite a nearly 50% reduction in government revenues in 2015, the country forked out about N1 trillion naira on fuel subsidies to end a recurrent fuel scarcity in the country. But subsidies are only half the problem. The low price of gasoline in Nigeria has created a significant arbitrage opportunity for gasoline between the country and its neighbors’. Consequently, a lot of gasoline is smuggled over the borders into neighbouring countries, even while the smugglers claim subsidy on it. As at mid-December 2015, the arbitrage between gasoline prices in Nigeria and its neighbors’, was averaging nearly N75 a litre.
The country’s gasoline is priced by an agency of the petroleum ministry called the Petroleum Products Pricing & Regulatory Agency (PPPRA), which was established in 2003. The PPPRA developed a pricing template in 2007, which has remained unchanged till recently (December 2015). The template is divided into two broad segments, the first is the composition of the landing cost of gasoline and the second being the margins for distribution of the product. The two sections together make up the open market price of gasoline or the full price, which is typically higher than the official pump price; the difference being the fuel subsidy.
Issues with the template
There have been several complaints about the pricing template of the PPPRA. The first being the fact that it uses the higher grade NWE Platts gasoline bought by European buyers while Nigeria imports a lower grade gasoline with a higher Sulphur content. This grade is at least $25 – 35 cheaper per tonne than the reference grade. However, Platts has only begun in 2015 to publish an assessment for the West African gasoline grade. The template is also static with its charges and margins remaining unchanged since 2007 when it was developed. Consequently, even if the actual charges and margins have fluctuated over the years, the cost-savings have not been passed on to the final consumer. The reverse has been equally true. More importantly, the static margins have made the petroleum marketing business, a low-margin business, saddled it with a lot of debt and only appear profitable on the long term for companies with investments in other segments of the oil and gas value chain. The final complaint is often the fact that there are several other smaller fees, duties and charges faced by marketers not captured in the template. Although these are supposed to be covered in bridging cost, they are not typically recognized for payment, i.e. additional security costs in distributing to troubled parts of the country, passage fees paid to street urchins in some suburbs of major towns, union fees and various bribes collected at depot/refinery gates to enable trucks load gasoline.
Changes in the template
The recent changes made in the template were however targeted at only resolving one issue – reducing the government’s subsidy burden by ensuring the full price was at a level where it no longer needed to pay anything. This was achieved by slashing the NPA, jetty throughput and storage charges included in the landing cost and the bridging fund fee included in the margins for distributors of gasoline. This changes enable the PPPRA reduce the open market price of gasoline to N85 per litre from N93.45 previously. The new template is to be assessed quarterly and only on an adhoc basis if the PPPRA senses there has been a substantial development warranting an assessment. This is expected to make sure the template is more reflective of market condition unlike the previous static template. Notably, margins for retailers, transporters and dealers are slightly higher in the new template than previous templates, giving them some confidence in the new plan. More importantly, the template achieves the government aim of having no more subsidies to pay as the open market price of N85/litre for Q1 2016 is less than the pump price of N86.50 yet this pump price represents a reduction on the previous N87/litre.
Source: PPPRA, analyst calculations
However, there are real risks to this happy picture. The two key risks are potential devaluation by the CBN and the risk of geopolitical crisis leading to higher oil prices. According to most analysts, the CBN could succumb to growing pressure to devalue the naira by allowing it float within a wider band; some have suggested between N199 and N220 per dollar, while others suggest to as far as N250. At N220 per dollar, the gasoline price shoots up to N93.86 at current landing costs, while it rises further to N105.30 if the naira is devalued to N250. If oil prices also increase and rise above $40, there’s a possibility the landing cost for gasoline could also rise above the current N71/litre. Although this is more far-fetched than a devaluation prospect, oil rising to $45/bbl. could force a major upward increase in the open market price to around N91/92 per litre as well, at current refining margins. Geopolitics has always played a role in resetting the global oil market during periods of prolonged lower oil prices such as we have currently. Thus, it is possible that if the oil price remains low, it could spark unrest and unrest in major oil-producing countries as their governments cut key benefits to the people to manage their fiscal pressures, creating supply shocks.
If any of the two above scenarios occurs, the Petroleum Ministry and the Federal Government would thus have to take a decision to either announce higher gasoline prices or re-introduce subsidies for a short period. The expectation would be that higher oil prices could potentially strengthen the Naira and reverse some of the potential effect of higher oil prices on landing costs. However, the naira’s ability to strengthen during periods of higher oil prices has been historically haphazard. Furthermore, if the CBN chooses to devalue, and the cost of imports increases, this could be countered if the 3 functional refineries are able to produce at about 60% capacity. This would represent about 78% of the country’s consumption, reducing the need for imports. However, there is no guarantee that the refineries will be able to achieve this feat due to feedstock supply and pipeline/offtake security issues.
In my opinion, these issues make the NNPC’s revamping of the pricing template at best, a short term solution. The country needs to liberalize its gasoline market but this has to be achieved gradually to avoid some major issues. The lack of infrastructure to distribute the product across the country would suggest a move towards differentiated pricing, as against the current uniform price, such as is obtainable in Kenya where the prices are graduated based on distance from the major port of entry in Mombasa. Furthermore, due to the importance of gasoline (65% of fuel consumption in the country), full liberalization of the market and potential collusion among major marketers could send prices high in many parts of the country and keep them high. Thus, the NNPC retail arm must remain a key player in the market.
In my opinion, it needs to be the largest player in the market with distribution capacity in all parts of the country, giving it ability to influence prices without government having to set prices for everyone. To achieve this, it may require corporate finance support from the capital market, even if not listed. Ultimately deregulating the market will allow private investment into smaller modular refineries, augmenting the huge investment by Dangote, which could eventually focus more on export markets considering Sub Saharan Africa’s huge fuel imports.
Analysis: Total Nigeria needs a financial overhaul
Total Nigeria’s Q1’20 results are a testament that some might have it worse than others as it recorded a revenue drop of 9.3% to N70.2 billion
The Oil Industry has had a particularly tough year, owing primarily to the novel pandemic. The International Energy Agency (IEA) predicts that the global oil demand is expected to further decline this year as Covid-19 spreads around the world, constraining travel as well as other economic activities.
Organizations like Total depending on international trade will be forced to scale down operations until restrictions ease off. However, Total Nigeria’s Q1’20 results are a testament that some might have it worse than others.
The period recorded a revenue drop of 9.3% to N70.2 billion in the first quarter of this year compared to Q1 2019. Total earns its revenue from three main sectors namely: Networks, General Trade, and Aviation. Revenue from Aviation fell by 39.5%. The decline in Networks is attributed to the reduced demand as a result of the enforced lockdown and restriction on travel across the nation.
Yet, it is clear that the company had its own challenges pre-COVID-19. In the quarter, it attained a loss after tax of N163 million which was 65.6% better than the loss after tax of the comparative quarter; it is overwhelmed by a myriad of distinct issues.
First off, its revenue has experienced a steady fall over the years; reasons for this is tied largely to its lack of importation of petroleum products.
It is also burdened by inefficiencies in its operations evident in its high operational and direct expenses, as well as its high debt over the past years. The company has carried on huge loans and borrowings in its books: N40.6 billion in 2019 and only a marginal reduction of N2.2 billion in the current year.
Even higher are its expenses after an 8.38% reduction in the just-released results, it arrived at N69.7 billion for Q1 2020. Amongst its high operational expenses is the high and increasing technical fees it pays to its parent company. From N251 million in the first quarter of last year, it incurred around N700m in the year under review. It also has cash flow issues with about N22b in negative cash and cash equivalents. In its 2019 report, it revealed that the year had been tough with its cost of doing business rising exponentially as evident in its interest expense, 395% higher than the previous year as a result of repayment for products and a high level of borrowing.
The company, in its last full year annual report, noted that to make significant savings to both operational and capital expenditure costs, a series of initiatives relating to cost efficiency, process optimization, and significant reduction of working capital requirement and finance costs, were put in place and are in motion for this year.
As Dr. Fatih Birol, IEA’s Executive Director put it “The coronavirus crisis is affecting a wide range of energy markets – including coal, gas, and renewables – but its impact on oil markets is particularly severe because it is stopping people and goods from moving around, dealing a heavy blow to demand transport fuels.”
However, Total’s position goes beyond the impact of the pandemic. Its rebound rests on its ability to carry on with cost control and lower debt commitments, together with the speed of the containment of the virus. That said, the company might need to raise capital soon while also coming up with formidable strategies to strengthen its business model.
Merger, Tax incentive boosts BUA Cement FY 2019 result
BUA Cement Plc recently released financials reveal a 47.5% increase in revenues of N175.52 billion up from N119 billion in 2018.
One of the industries set to experience the downsides of the Covid-19 pandemic is the construction industry. Given the slowdown in construction activities as a result of the lockdowns and constrained economic activities, the reasons are not farfetched.
Prior to the outbreak of the pandemic, Globe Newswire had predicted an accelerated growth pace of the global construction industry from 2.6% in 2019 to 3.1% in 2020. This growth has now been revised to 0.5%. What is even more daunting is that the revised growth rate is based on the assumption that the outbreak will be contained across all major markets by the end of the second quarter of 2020.
It is only after that (including freedom of movement in H2 2020) that events could facilitate reverting to the normal course of activities to foster businesses in the industry like BUA Cement or those that depend on it to restart activities.
Nigeria’s third-largest cement company, BUA Cement Plc, however, still has its 2019 victories in order. Involved in the manufacturing and sales of cement, BUA Cement has 3 major subsidiaries and plants in Northern and Southern Nigeria.
With a market capitalisation of N1.18 trillion ($3.3 billion), BUA is the third most capitalised company on the NSE. Its recently released financials reveal a 47.5% increase in revenues of N175.52 billion up from N119 billion in 2018.
The company’s profits also increased by 69.1% from N39.17 billion in 2018 to N66.24 billion in 2019. Core operating performance was strong, and this was supported by strong cement sales in the domestic market, impairment writes back, and other income.
The main reason for the company’s increased earnings is from the cost synergy and increased revenue as a result of the merger that took place between CCNN Plc and Obu Cement Company Limited.
There was also a striking jump in its income statement on its tax for the year. For FY 2019, it incurred a tax expense of N5.6 billion, in comparison to the N24.9 billion tax credit it received in FY 2018.
This was as a result of a reversal of previous tax provision made on Obu Line 1; it received approvals for an extension of the company’s pioneer status on Obu line-1 and Kalambaina line-2 in February 2020, to leave effective tax rate at just over 8% in 2019. The pioneer status will help the company save funds that will otherwise have been spent on higher taxes.
(READ MORE:Dangote Cement to access more debt funding)
BUA reported an impressive FY’19 result. Its performance shows the growing strength of the company and its increasing market share. On the back of the strong performance, management declared an N1.75 dividend per share that translates to a dividend yield of 5.5% on current prices.
Cash flow position was also robust with a strong closing cash balance – from N2.8 billion in 2018 to N15.6 billion as at year ended 2019. The company’s growth, as well as the impact of its merger, present a great buy opportunity of the highly capitalized, low-cost stock. As of today when the market closed (21st May) its share price stood at N35.60 from a 52-week range of N27.6 and N41.
What we see is a great growth stock further heightened by the population expansion and increased urbanization. However, we expect the impact of the Covid-19 pandemic to be felt from the Q1 results of the company.
The industry could slow down for the year as the level of commercial construction also slows down. Yet the best part of holding stocks like this is that even with stalled operations for a period, a resurgence will always emerge.
Analysis: Airtel Nigeria is winning where it matters
Airtel has left no stones unturned in ensuring that its provisions are top-shelf – subscribers to the network, of course will have their own ideas.
Airtel might have won our hearts over with internet-war adverts starring our favourite tribal in-laws, but its fundamentals are what will make us the bucks that keep us happy. Airtel Africa Ltd is a subsidiary of Indian telecoms group, Bharti Airtel Ltd; the group has left no stones unturned in ensuring that its provision of prepaid plans, credit transfers, mobile internet services, messaging, roaming facilities and more, are top-shelf – subscribers to the network, of course, will have their own ideas.
Since last year when Airtel Nigeria became the second telecommunication company in Nigeria listed on the NSE, the company has experienced a steady level of growth. With a presence in 14 African countries, the group’s strength lies in its diversity with stronger companies mitigating the poor performances of others.
Performance Overview: Airtel Africa
Airtel Africa’s report for the year ended March 2020, revenue jumped by 10.9% from $3.1 billion at the year ended 2019 to $3.4 billion in 2020. The consolidated profit before tax also jumped by 71.8% from $348 million in 2019 to $598 million in 2020. However, profit for the period dropped by 4.23% with earnings of $408 million in 2020 from the $426 million it had earned in 2019. A reason for this is the tax figure that moved from a credit of $78 million in 2019 to tax payments as high as $190 million in 2020. Total assets also jumped by 2.41% from 2019’s value of $9.1 billion to $9.3 billion in 2020 primarily as a result of their acquisition of more property, plant, and equipment (PPE). The total customer base grew by 9.3% to 99.7 million for the year ended.
Full Report here.
Revenue growth of 10.9% was driven by double-digit growth in Nigeria and East Africa. However, the rest of its African operations experienced a decline in revenue. Its success in Nigeria is especially commendable, considering the fact that the company lost more than 100,000 subscribers in Nigeria between December 2019 and January 2020. Raghunath Mandava, Chief Executive Officer, remarked that the results which were in line with the group’s expectations, “are clear evidence of the effectiveness of our strategy across Voice, Data and Mobile Money.”
Behind The Numbers – Nigeria
Airtel Nigeria’s performance indicates the company is making the right calls in a very competitive industry. Nigerians are fickle when it comes to data and voice but will spend if the service is right. The company grew its data revenue by a whopping 58% to $435 million a sign that its strategy to focus on data is working. Voice Revenues for the year was up 15% to $850 million. In total, Airtel Nigeria’s revenue was up 24.4% to $1.37 billion. Ebitda margin, a number closely watched by foreign investors 54.2% from 49% a year earlier. Operating profit for the year ended also jumped by 52.6% for the year from 2019 and 32.4% from Q1 2019. Total customer base in Nigeria also grew by 12.5%.
Nigeria is surely critical to Airtel Africa’s future seeing that it contributes about one-third of its revenue. Recent results thus indicate it is winning where it matters most and it must continue to stay this way if it desires to survive a brutal post-COVID-19 2020. Telcos are expected to be among the winners as Nigerians rely more on data to work remotely but there are other players in this game. Concerning the impact of the pandemic, he explained that at the time of the approval of the Group Financial Statements, the group has not experienced any material impact arising from the impact of COVID-19 on its business.
On cash flows…
The group has also taken measures to enhance its liquidity. The CEO explained that it is moving its focus to enhance liquidity towards meeting possible contingencies.
“Having considered business performance, free cash flows, liquidity expectation for the next 12 months together with its other existing drawn and undrawn facilities, the group cancelled the remaining USD 1.2 billion New Airtel Africa Facility. As part of this evaluation, the group has further considered committed facilities of USD 814 million as of date authorisation of financial statements, which should take care of the group’s cash flow requirement under both base and reasonable worst-case scenarios.”
To this end, they have put in the required strategies to preserve its cash as its cash and cash equivalents, consequently, jumped by 19.1%.
Investors looking at this impressive result will be wondering if this portends a buying opportunity. Airtel Nigeria closed at N298 on Friday and has remained at this price for about a month. The stock is quite illiquid and is not readily available to buy.
It’s the price to earnings ratio of 4.56x makes it quite attractive. Further highlighting this opportunity is its price-to-book ratio which is as low as 0.5273, suggesting that the stock could be undervalued. Whether it is available to be bought, is anyone’s guess.