It’s stock pick Wednesday at Nairametrics and as usual, we bring to you a selection of stocks from a pool of investment analysts, stockbrokers, expert stock pickers and the Nairametrics team.
This week’s stock picks come from ARM Research and they have selected the duo of Seplat and Unilever as their stock picks for the week. Surprised? Well, they provided a pretty good explanation for their selection.
Before you dive in, take time to read our disclaimer policy and remain to always consult an expert financial adviser or analysts should you want to make a buy or sell decision.
SEPLAT
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Last week, Seplat shares traded at a flat price of N665.10. Nevertheless, we still see significant upside to the stock underpinned by the company’s extended debt maturity profile which feeds into an improved cash position, unrecognized capital allowance, reserve accretion and higher receipt from crude oil lifted in OML 55. We, therefore, have a new fair value estimate of N952.81(Previous FVE: N663.85).
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On the debt profile, Seplat secured a one-year extension on its revolving credit facility (RCF) now scheduled to expire by year-end 2018 (Previously: Year-end 2017). The RCF was amended to amortize the outstanding principal balance of $150 million over 5-quarters in equal installments, commencing Q4 17.
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Furthermore, the company refinanced its RCF with a new four year $300 million RCF now due in June 2022 at Libor + 6%. Finally, Seplat issued $350million senior notes at 9.25% due 2023 to repay its existing 7-year term facility which has a maturity of ~$145 million in 2018 and 2019 apiece. Given the foregoing, gross debt should print at $550 million in Q1 2018 with free cash flow at $500 million.
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Following the tax credit recognized in 2017 which relates to its entitled allowance during the pioneer tax period, we estimate a capital allowance of $200 million yearly over 2018 to 2020. On production, we expect working interest production of 43.3kbopd (+17% YoY) in 2018. The foregoing alongside our crude oil price and gas projection of $60/bbl. and $3/Mscf respectively should drive a 40% YoY expansion in revenue to $634 million. Management noted that it has hedged 3.6mbbls and 3.0mbbls. in H1 and H2 2018 at an average strike price of $40/bbl. and $50/bbl. respectively, in a bid to support its cash flow strategy.
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Having factored these changes into our model, we place a BUY recommendation with a FVEÂ of N952.81 ( 43% upside from prior closing price).
UNILEVER
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Unilever Nigeria (Unilever) sustained earnings recovery in its full-year 2017 results with a record after-tax earnings of N7.5 billion, representing a 142.5% YoY increase from the prior year and translating to EPS of N1.78 (FY 16: N0.81; FY 15: N0.32). In terms of earnings driver, higher revenue (+30.1% YoY to N90.8 billion) was the major driver, which more than offset input cost pressures to drive a 280bps expansion in gross margin to 32%. Q4 17 standalone performance was also positive as EPS rose 36% to N0.50 underpinned by sizeable increase in operating profit (+46.5% to N3.5 billion) reflecting higher revenue, and finance income (+17.7% to N1.0 billion).
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Going forward, higher petrochemical prices from the sustained rise in crude oil price remains a key factor in Unilever’s earnings even as we expect Crude Palm Oil (CPO) to moderate in 2018. Nonetheless, expected increase in revenue from a mix of price and volume as well as an expected rise in finance income should offset these pressures which drive our expectation for earnings to rise 57.5% YoY to N11.7 billion. However, due to the dilutive impact of the additional shares (1.96 billion ordinary shares) from the rights issue in Q3, our EPS forecast of N2.04 represents a 14.6% YoY increase from FY 17.
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Unilever Nigeria has gained +45.9% Year-to-Date (YTD), stronger than the return on the personal care segment (+34.7% YTD) and NGSE All-Share Index (+6.8% YTD). On our 2018 numbers, Unilever trades at a P/E of 29.3x relative to Bloomberg Middle-East and Africa (MENA) peers of 28.6x. We retain our SELL rating on the stock with our FVE estimate of N33.56.
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