In Nigeria’s downstream, the gloom persists
With earnings season now over, we have yet another opportunity to take more than a cursory glance at the H1:2019 financial scorecards for Nigeria’s downstream segment. The narrative is largely unchanged from Q1, although with a further shift in fortunes to the downside. In H1, overall topline for listed players (ex-OANDO) took a 1.67% hit, pitching in at NGN584.54bn (vs. NGN594.45bn in H1:2018), as product stockpiles built up. For TOTAL (-3.48%; NGN150.83bn), MRS (-52.18%; NGN29.80bn) and their ilk, large retail networks were not enough to drive substantial topline growth.
While TOTAL shut down some of its retail outlets during the period for renovation/upgrades, MRS shifted emphasis from serving its Bulk/Industrial customers (which historically are receivables-laden) to a retail-driven strategy, a shift which has impacted its revenues in the short-term but is certain to deliver better efficiency in asset-use in the long-term. After a 4-month hiatus resulting in suspension by the NSE, CONOIL finally turned in its 2018FY, Q1:2019 and H1:2019 results. While its governance issues remain a critical red flag, the company is staking a claim to the crown of “downstream darling” after posting a NGN72.22 billion topline (+32.56%) in the half-year and significant bottom-line growth, in spite of the prevailing environment. Bottomline growth across the segment was a sizeable 8.33% (NGN8.72bn to NGN9.44bn), albeit propped by FO’s NGN5.45bn (+1,386.97%) and CONOIL’s NGN1.03bn (+87.54%), as all other players recorded earnings declines.
Then again, FO’s result was purely a one-off income booked on the back of outstanding subsidy payments, which suggestively waters down the quality of the earnings growth posted. Share prices have reflected sentiment on the segment; the NSEOILG5 has lost 27.30% YtD, with the likes of TOTAL and FO testing new year-lows. The consensus is clear – the risks in Nigeria’s downstream are as diverse as they are knotty. As we work towards domestic sufficiency in refined products in the near term, PMS prices need a much-needed lift as quickly as is realistically possible.
Refining Capacity taking Shape, as Dangote, Edo refineries get delivery dates
By October 2019, Nigeria will have added 6,000bpsd in refining capacity to the existing volumes, with the commencement of the Edo modular refinery. Much smaller than the conventional refinery, a modular refinery is designed such that its components are assembled on-site, rather than constructed from scratch. Fabrication and construction of parts for the Edo Refinery has already been completed in China and is currently awaiting inspection cum approval by the Department of Petroleum Resources (DPR) before being shipped to Nigeria. Due to their configuration, modular refineries produce greater yield efficiency for products when they are fed with the light-grade crude oil which Nigerian oilfields produce.
The process between 500bpsd and 30,00bpsd, with a far less operating cost. Very recently, the Nigerian government has inclined towards modular refining to improve capacity, availability of locally sourced products and general investment into the refining segment of the oil and gas industry. This shift appears poised to yield impressive dividends, as 31 of the 37 (84%) licensed private refineries as at December 2018 were modular refineries, with 3 of them having been granted Approval-to-Construct (ATC) licences, while 12 own active Licence-To-Establish (LTE).
The USD12bn Azikel Refinery in Gbarain, Bayelsa state also has a 2021 completion date, while the largest refinery on this side of the world – Dangote’s 650,000bpsd single-train facility is also set for completion c.2021. In July, the refinery’s atmospheric chamber (touted the largest in the world), set sail from China. Current national refining capacity (PH 1 & 2, Warri, Kaduna and NPDC) is 446,000bpsd. With the planned additions of Dangote (+650,000bpsd), Modular Refineries +689,000bpsd) and Other Complex Refineries (+700,000bpsd), overall capacity is set to surge to c. 2.49MMbpsd from c.2023, cutting back importation, building a viable export market and increasing contribution of the oil and allied industries to national GDP.
Is Nigeria in pole position to leverage IMO 2020 shift?
January 1, 2020 will herald new regulations in the maritime industry that have far-reaching implications for the global oil and gas business. In fulfilment of its climate change obligations, the International Maritime Organization (IMO) has stipulated that all marine bunkers and vessels are powered by only Low Sulphur Fuel Oil (LSFO), which hold sulphur content of 0.5% or below. As a way to circumvent this new rule, vessels can rather install an expensive “scrubber” system which acts to remove sulphur content from the exhaust before discharge into the atmosphere.
This new rule directly impacts “sour” oil (sulphur content >0.5%) producing nations, as we expect to see a rapid shift towards sweet crude types which hold relatively lower impurities. As most Nigerian crude varieties are on the light sweet end of the spectrum, this is immediately positive news for investors in Nigeria’s exploration space. Specifically, Bonny Light, Brass River and very recently, Egina varieties have proven popular with buyers; an indication that the goldmine is undoubtedly offshore. However, fiscal terms for the industry (as codified in the various subdivisions of the Petroleum Industry Bill) remain uncertain and are constraining capital investments.
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OPEC Strategy in the Balance, as Trade Rift Escalates
At the July meetings between OPEC and its Non-OPEC allies, Iraq (one of the founding members and 2nd-largest producer in the OPEC bloc) suggested a 1.8mbpd production cut, seeing this as the key lever to balance an oil market that was increasingly tending towards
a bearish outlook. The rest of the coalition took exception, instead of maintaining the status quo at 1.2mbpd, albeit for longer into Q1:2020. Iraq now appears to be vindicated, as fears about weakening global demand have been exacerbated by the escalation of the trade war barely a month after that meeting. In the first week of August, oil prices dipped below the psychological mark of USD60pb, testing new 7-month lows at USD57pb. The announcement by US that a 10% tariff would come into effect on the last tranche (USD300bn worth) of Chinese goods, effective September 1 was the trigger traders needed to sell off on oil.
As China retaliated via a number of announcements, global equity and fixed income markets felt the heat, and oil futures were not spared. The US President has since backtracked, with tariffs on a number of key goods now set to kick in from December 15. While prices have seen a slight recovery since then, they remain firmly below USD60, a valid pointer to the fact that the risks did not go away, they were only delayed. Critical
questions are now being asked of the near-term sustainability of the current OPEC strategy, particularly with the US rapidly gaining a march on the coalition’s market share. In July, the group pumped 246tbpd (-0.8%) lower than it did in June, with gross crude production now at 29.61MMbpd, 3.77% lower than the 30.77MMbpd recorded at the start of the adjustment period in January – the 9th successive month of declines. Saudi Arabia keeps leading from the front (-134tbpd in July) and has promised an additional 2MMbpd in cuts in the next few months.
In addition to the tensions in the Persian Gulf, artificial declines in Iran and Libya are also helping this cause. However, the demand picture remains the overarching issue and the speedy compromise or otherwise of the trade war will determine the direction in which oil speculators pitch their tents for the rest of 2019. In the meanwhile, OPEC might need to make a forceful statement of intent – perhaps by announcing a much larger cut, to calm the morbid frenzy.
Will Argentina’s Vaca Muerta replicate US Shale Success?
In the early 2010’s US crude imports began a pronounced slump. The US did not discover any new significant conventional oil formations, but a new way to drill oil from difficult areas. Thus began the shale boom, a precursor to the global oil price crash of 2015/2016. Since then, the US has seen sustained success with its shale efforts, nicking the title of the world’s largest producer from Saudi Arabia in 2018. Current production levels are c.12MMbpd, with c.70% of this made up by Shale.
With c.2MMbpd in production, the Permian Basin in Texas is the most evident driver of US shale exploits. On the other side of America, the Vaca Muerta is warming up to lead crisis-ridden Argentina out of an economic watershed. Spanish for “Dead Cow”, the Vaca Muerta shale basin was also discovered in 2010, with the EIA putting proven reserves at c. 16.0bn barrels of oil & condensate and 308Tcf of gas. Natural gas production in Argentina touched 1.0BCfd in December 2018, largely due to the shale play which currently accounts for c.23% of Argentina’s gross natural gas production. Oil produced from this basin is of the light-sweet variant, and would readily compete with US shale and other favourites such as Nigeria’s Bonny Light in the international market, more so, with IMO 2020 regulations coming on board in January next year.
While some early production forecasts have put the formation’s potential at 1.25MMbpd, OPEC has put out more cautious numbers – an average supply of 0.46MMbpd up until 2023. While the numbers do not point to a very strong threat, we acknowledge that the competition in the light-sweet market has intensified, prominently in the gas market where Nigeria is currently the 4th largest LNG exporter and has reserves of only c.202Tcf.
Tensions across the Persian Gulf could further embolden the bears
In July 2019, tensions in the Persian Gulf got to a head, as Iran sustained protection of its oil market share, in defiance of sanctions imposed on it by the US and its allies. Two tankers, one owned by the US and the other by the UK, were seized along the Strait of
Hormuz, the key artery for global oil trade.
The United Kingdom similarly seized an Iranian tanker on the British overseas island of Gibraltar, arguing that Iran was evidently circumventing the sanctions by selling oil in the international markets. There have been indications that the Middle-East country has sustained sales via illegal mechanisms including ship-to-ship transfers and turning off tracking devices to stay off the radar of maritime watchdogs.
Watchers have similarly suggested that Iran has found a willing accomplice in the Orient, as it continues to ship to China, which is also at the receiving end of US tariffs. If Iran is somehow still finding space for sales, it goes without saying that the oil market will sooner than later be in a state of oversupply, a situation which will counteract OPEC’s output cuts and place further downward pressure on already-battered prices.
Top of the mind (in the near term though) is the OPEC output cap, which would limit the extent of any production ramp-up. As it were, the US is now the world’s largest source of light-sweet crude and remains strategically positioned to take advantage of the new
regulations. However, as shale growth peaks in the early 2020’s (and subsequently declines), vessels will need new fuel sources. The investments required to take full advantage need to be in place from now.
Why SEC should support democratization of sale of foreign securities
In the spirit of progressive engagement and dialogue, many voices now suggest that the SEC take a fresh look at its latest position.
The directive of the Nigerian Securities and Exchange Commission (SEC), issued 8th of April 2021, has been met with consternation and a straightforward (but hopefully simplistic) interpretation that; “the government is out to stifle innovators, again.”
These perspectives aren’t unfounded, as innovators of all shades have taken a heavy beating lately due to a number of direct government policies or interpretations of these policies – irrespective of how well-intentioned these policies may be. On the contrary, micro-investment platforms deserve a fair shot within Nigeria’s capital market.
This is especially true considering that the recent regulatory fervour coincides with a period where the innovation ecosystem is recording new milestones and gaining traction, solving problems for users in all walks of life, democratizing wealth creation, and creating high-value jobs, all of which Nigeria desperately needs.
In the last six months alone, Nigerian startups have gained the confidence of some of the best investors locally and globally, leading to never-before-seen innovations, acquisitions, and investments into the economy. This promotes interest in the Nigerian innovation ecosystem from foreign market actors and increases its relevance as a high-value job creator. Some now wonder if our regulators want more or less of this positive momentum.
This latest notice from the SEC warned Capital Market Operators (CMOs) to desist from selling securities not quoted or registered, as only registered securities in Nigeria can be issued, sold, or offered for sale. Ostensibly, the directive requires CMOs registered with the SEC to offer only securities listed on any exchange in Nigeria to the public.
The challenge here is that High Net worth Nigerians (HNIs) have always had access to foreign securities offered or acquired through registered CMOs for the apparent benefit of the upside available in markets such as the United States. This should be democratized to allow Nigerians with smaller incomes to have access to valuable global stocks within fair rules, and this is what the likes of Trove, Chaka, Bamboo, and Risevest have done. In fact, this democratization should be applauded as one of the outputs of a thriving innovation ecosystem that provides practical
palliatives for the stifling inflation and erosion of value we have all experienced as Nigerians.
After all, what is suitable for Dangote should also be good for Musa, who earns NGN50,000.00, and thanks to any of the apps mentioned above, can today invest in shares of Dangote sugar while also adding a quarter of a Google stock to his portfolio every month. This “magic” of innovation is a poverty alleviator that should be encouraged and nurtured while ensuring that the public is protected from any harmful financial practices.
It is important to acknowledge at this point that the SEC has been a positively progressive regulator, generally engaging its public fairly. The issuance of the guidelines for crowdfunding and accommodation of FinTechs within the capital market was encompassing and engaged stakeholders of all hues. This should be commended. The SEC’s position classifying crypto as an asset class is also fair, refreshing, and proactive. We need more of this and not less.
At a time when we are exploring how the Nigerian capital markets can become a viable option for listing tech startups, this latest body language of the SEC, and the Nigerian government as a whole can be further misinterpreted.
In the spirit of progressive engagement and dialogue, many voices now suggest that the SEC take a fresh look at its latest position, as these innovations are widespread, publicly accepted, and valuable. Furthermore, these innovations support some of the registered and regulated CMOs by offering white-label solutions that are accelerating the ability of these legacy CMOs to better serve their HNI customer base, with local and foreign securities. The emergence of these innovative micro-investing platforms has triggered investments into local Nigerian securities in multiple folds. The volumes these innovative platforms channel into Nigerian stocks are arguably the most significant development in Nigeria’s capital market in a decade.
By virtue of the existence of these innovators, their combined strength has introduced over 150,000 new market participants who are primarily millennials: a majority of whom purchased their first set of stocks through these platforms. Before now, they had no active interaction with the capital market. These new entrants are now trading in excess of NGN10,000,000,000 (Ten Billion Naira) monthly through these apps. Note that a good chunk of the highlighted trade volume is routed through local CMOs to purchase Nigerian securities on the Nigerian Stock Exchange(NSE). Long term, these innovations would also serve as a channel to offer Nigerian guarantees to a global audience which would be a massive positive for the economy.
The quest for diversification of portfolios to include foreign securities can only be good overall. It underscores the global trend in cross-border trade in securities as disintermediated by technology and the need to enhance portfolios’ value globally.
Rather than curbing the practice of offering Nigerian and international stocks in a basket, this micro-investing trend should be allowed to flourish within reasonable regulatory frameworks. These platforms make investments attractive, easier, and affordable. Micro investing will curb the menace of pyramid and Ponzi schemes while introducing a new generation into Nigeria’s securities market in parallel with their appetite for global securities. Regardless of what we decide, the world has gotten smaller, and information that enables people to easily seek the best economic outcomes is readily available. While other nations gain from micro-investing, shouldn’t our people do too?
The ultimate beneficiary of increased wealth for Nigerians is the Nigerian economy. Rather than shutting Nigerians off from the rest of the world, we should be accelerating global access for our millions of people; hence this is the time for dialogue, not shutdowns.
Kola Aina is the Founding Partner at Ventures Platform and writes from Lagos, Nigeria.
Buy what? Dangote vs BUA Cement
Dangote Cement has a market capitalization of N3.65 trillion, while BUA posts a N2.49 trillion capitalization, but does size win?
I want to review the performance of the largest quoted companies in Nigeria.
On the Nigerian Stock Exchange, they don’t come any bigger than Dangote Cement (Dangote) and BUA Cement (BUA). Only MTNN stands with both cement companies in terms of market capitalization. Dangote and BUA are both blue-chip companies, in the same sector and both enjoy federal import protection, they also both serve a local market with huge demand for cement.
Which is a better investment? Let us assume I have N100,000.00 (One Hundred Thousand Naira,) which should I buy? Let us review both stocks with FY 2020 results they posted. For consistency, I am going to use my trading view terminal numbers.
First, we talk about capitalization, (Market cap is the number of shares issued x market value of shares ). Dangote Cement has a market capitalization of N3.65 trillion, while BUA posts a N2.49 trillion capitalization. Does size win? Dangote is bigger? Not yet!
With N100,000 I can buy about 465 shares of Dangote at N215 a share and 1,360 shares of BUA at N73.50 per share. Is BUA cheaper? do we have a winner? Not quite. Let us dig deeper.
Dangote Cement posted a Net Income figure of N276 billion, if we divide this earning by the number of issued shares which is 17 billion, we get an Earnings Per Share (EPS) of N16.14, so every share of Dangote Cement earns (not pays) the investors N16. Similarly, the Earning Per Share of BUA is N2.0
Thus when I buy Dangote Cement N215 per share, I am buying 16 times the earnings of Dangote. We can simplify this by simply comparing the price I pay per share of Dangote to the EPS of Dangote (Price to Earnings Ratio), thus I invest my cash of N215 to buy 16 times the earnings of Dangote, thus the Price to Earnings Ratio of Dangote is 13.31 (P/E). Using the same calculation, the price for each earnings of BUA (the P.E.) is 35.38. This means even though I am paying more cash for each share of Dangote, I am paying less to buy the earnings of Dangote, thus Dangote is cheaper than BUA.
So our first milestone is reached, we have used the Net Income, Market Price, and Number of Issued shared to get the Earnings Per Share, we have then determined what amount of earnings we are buying to determine which stock is at a bargain.
Let us look at the earnings that will be paid in cash. Remember, Earnings, is just the Net Income of Dangote, we as equity holders have the opportunity to share in any portion of the Net Income.
Dangote in 2020 paid out from earnings N272.69 billion as dividends, this translates to about N16 per share or in terms of returns 7.44%. We get this Dividend Yield return by comparing the dividend paid to the market price per share (D/P). BUA also in 2020 paid out N59.26 billion as dividends from earnings, this translates to a dividend yield of 2.81%.
So, if I invested N100,000 in shares of Dangote Cement, I would earn a cash return of 7.44%, if I did the same with BUA I would earn a cash return of 2.81%.
Let us go a bit deeper…
When you buy a stock, you are buying into the earnings and cash flow. Dangote Cement in 2020 earned N276 billion and paid N272 billion as dividends meaning they retained about N3 billion for that FY while generating over N248b in Free Cash Flow. Similarly, BUA earned a net N71.52 billion, paid out N59 billion in dividends, retained N19 billion but posted a negative Free Cash Flow of (N95.49 billion). Should BUA cement have simply used that cash to finance working capital rather than paying it as dividends? Perhaps. Let us speak more of Cash flow.
Cash retained is cash not paid to you the investor. You have to ask how well your company is utilizing that cash retained. Should it all be paid out as dividends? Or retained in the company to fund expansion and growth?
Look at it this way, if Federal Government Bonds were offering a Yield of 15% and we see that Dangote is offering a yield of 7.44%, then as shareholders you should demand that Dangote pays more cash to you to allow you to invest in FGN bonds because you get a higher return (at lower risk). The point is any company retaining cash or paying cash at a lower yield than the market is hurting the investors, who are missing the opportunity of investing higher elsewhere.
Let us score both company managers by how well they have managed the revenues and capital of the companies
|Return on Assets %||Return on Equity %||Return on Invested Capital %||EBITA Margin %||Net Margin %||Debt to Assets||Long Term Debt to Assets|
Across the board, the management of Dangote Cement has done a better job when compared to BUA Cement in managing the assets of the company. Dangote Return on invested capital is higher with a much lower recourse to debt and of course a higher FCF number.
Overall, on Earning, Returns and Efficiency, it appears Dangote Cement posts better fundamentals…
There is a wealth of information that should help decide whether you should buy a stock or not and how long you can hold on to it. Our recommendation is based on the information we currently have and is wholly the opinion of the writer
This article is an investment guide and as such you should conduct extra analysis before deciding whether to buy, sell or hold a stock. The decision to buy, sell or hold a stock is solely yours.
Nairametrics | Company Earnings
Access our Live Feed portal for the latest company earnings as they drop.
- Friesland Campina Wamco Nigeria Plc announces AGM, proposes dividend of N6.74 per share.
- ETI appoints Akin Dada as Group Executive, Corporate & Investment banking.
- Union Homes REIT proposes final dividend worth N465.03 million for shareholders.
- GT Bank Plc holds FY 2020 investors presentation.
- Cornerstone Insurance Plc notifies stakeholders of late submission of financial statements.