Seplat Petroleum Development Company released its 2015 FY results on Thursday, showing profit after tax dropped 68% to N12.9 billion. The company also reported revenues dropped by 9% to about N112 billion. Seplat also declared dividends of about 4 cents per share culminating in a final dividend of 8 cents per share for the year. It paid a total of 15 cents per share in 2014 as dividends.
Seplat closed trading on Friday at a share price of N300 shedding about 2.6%. Shareholders of Seplat have seen worse days even though the stock is up about 48% to date. This of course is due to the fact that the stock had risen from an all time low of about N151 which it touched back in January. At the current price of N300 Seplat trades at a price earnings multiple of 12x and a dividend yield of just over 5%. Is this price worth paying for?
Seplat’s fate is closely intertwined with the price of crude oil. The company sold crude at a hedged price of about $51.2 bbl as against $97.2bbl reported in 2014. Volumes for the year was up 40% to 43, 372 boepd (2014: 30,823 boepd). For Seplat, so long as crude oil prices remain below $50 per barrel, revenues will continue to remain bearish. This means profitability will likely remain in the decline this quarter and possibly next, further denting its valuation.
Cost of sale
As revenues dropped by 9% Seplat’s cost of sale increased by 25% year on year. A huge portion of this increase is attributable to crude handling fees which spiked to N12.5 billion about 4x what it incurred in 2014. The company explains that this charge includes a $25 million excess charge relating to 2010 – 2014. Crude handling charge is paid to NPDC for using its storage facilities among others. Seplat however, reveals that it has now constructed and commissioned two new 50,000 bbls crude storage tanks which should ensure it does not incur this cost going forward. Nevertheless, investors ought to be worried as depreciation and amortization cost still remain stubbornly high. Seplat in 2013 had a gross profit margin of about 62% compared to the 49% posted this year. It desperately needs cost to either go down or for revenues to creep up to get back to the 60% plus region. Without that, shareholders will continue to take the piss.
Seplat accrued a N4.25 billion income tax expense in the event that the Nigerian Investment Promotion Council (NIPC) does not extend their pioneer certificate by another 2 years. The company obtained a tax holiday for three years ended December 2015 and is now requesting for a two year extension. However, the current government had largely criticised the Jonathan Government for ‘recklessly’ granting tax incentives for companies that they believe do not need it. Seplat was under the radar for this last year and had to come out to defend the existing pioneer certificate it had at the time. If the government refuses to renew the pioneer status then shareholders are in the hook for lower profits going forward and by extension smaller dividends.
Too much capital
Seplat currently has a total net assets of N281 billion. This makes it one of the most capitalized local upstream Nigerian companies. Yet they currently cannot sweat that equity enough posting a return on equity of just under 5%. Currently its net assets per share is about N501 which means it needs to earn a lot more profits to justify any valuation above N500. This is why the stock currently trades at a discount to its book value of 59%. Seplat will therefore need its profits to be in the region of about N80 billion annually (which it last attained in 2011) for its valuation to rise above its book value per share..
The above makes Seplat’s current valuation seem expensive. A 12x multiple, a 5% dividend yield and a return on equity of just 5% makes the share price unattractive for value investors. Despite some strategic acquisitions made by the company in recent months as well as its active foray in midstream sector, it still needs the price of oil to rise above $50.
For value investors a share price in the range of N150-N200 seem ideal considering present circumstances. A N200 share price suggest an earnings yield of about 11%, still small by most standards. At N300 plus, there is little upside for the stock except Nigeria starts to record a massive inflow of foreign portfolio investments. For now, there are perhaps better stocks out there for investors to savour.