Nairametrics| Total Nigeria Plc released a blistering 2016 FY results last week. The company’s earnings per share rose four folds to about N43.58 beating most analysts’ estimates. Total also displayed all round efficiency in the period under review.
Gross profits were up 93.7% to N49.1 billion as the company earned N17 for every N100 of sales. Despite a high inflationary environment, operating expenses was also flat at N20.5 billion, helping the company report an equally impressive operating profit of N29.9 billion, a 4-fold increase from the year before. This results would have been what Americans call a home run except for few noticeable headwinds, nicely tucked in their annual report.
A look at the annual report shows not all was blistering in 2016. Firstly, the company reported that it incurred an exchange rate loss of about N9 billion during the year. Total relies on importation of petroleum products for its fuel division and was exposed during the year, when the CBN devalued the naira. The company currently relies on NNPC to fund its import as scarcity of forex became pervasive all year long. With multiple exchange rates, still the norm and a possible devaluation around the corner, there is likelihood that more FX losses could be suffered in 2017.
Secondly, Total’s working capital is also a slight challenge. After posting such an impressive result, the company still reported negative working capital during the year. It owes its trade creditors about N66 billion and owes other creditors another N29 billion. On a flip side, its trade and other debtors owe the company N48.4 billion out of which N18.4 billion is owed by trade debtors. The company also owes banks about N9.2 billion and owes another N6.3 billion in taxes. These are all claims to its N21.8 billion cash.
It’s no wonder the company chose to pay a paltry dividend after tax of just N7 bringing total dividend per share of the company at N17 per share. Investors are interested in the N7 DPS paid now which represents a 2.5 dividend yield. This is far from impressive for a company with a valuation of N274 and a price to earnings ratio of about 6.3x.
The share price appears to have priced in the latest results and may struggle to hit its 52 weeks high of N345/share. That will mean gaining 25% in the near term, which is lofty considering that it will still be marked down for dividends. You might argue that Mobil is trading at a P/E of 15x and Forte at 21.6.x. However, these are not good proxies for estimating Total’s valuation. Mobil going through an acquisition and Forte is still overvalued. We did assign a 10x price earnings for Total last year at projected earnings per share of N52 (Total posted N48), but the outlook has since changed.
Total has laid the marker for earnings growth in the downstream sector and shareholders must savour this moment. However, for the share price to meet our 2016 projection of N520, we will hope that their own rumoured spinoff of its downstream assets gathers steam this year.