Lubricant surge fails to mask waning topline growth

For the second consecutive quarter, TOTAL failed to achieve positive revenue growth in its petroleum products segment. The 9M:2019 scorecard bared a 2.24% Y-o-Y decline in gross revenue (NGN221.84 billion), with Q3:2019 emerging the major culprit. Quarterly revenue printed at NGN71.01 billion (+0.51% Y-o-Y), the lowest this year, only propped up by a 18.25% (Y-o-Y) uptick in lubricant sales (+NGN13.22 billion). However, Q-o-Q, lube sales shed 2.15%. Compared to 9M:2018, white product sales came in 2.83% lower at NGN57.79 billion.

The drop-off was even more pronounced on a Q-o-Q basis (-14.17%). TOTAL is finally reducing the exposure of its topline to bulk sales; on a Y-o-Y basis, there was a 22.50% decline in contribution from this segment (NGN14.91 billion), and -3.27% between Q2 and Q3. With the protracted delay in passage of the PIGB, the expected hike in price of PMS did not eventually materialize, and intensified competition means industry players have to settle for lower revenues this year.  On the back of this, our outlook on 2019FY revenue is now significantly moderated – a Y-o-Y decline of 4.29% (NGN294.78bn) even while we envisage further expansion in the lubricant business.

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Net Margin Pressured by “Management Fees” and Finance Costs

In Q3:2019, TOTAL’s Cost-to-Sales (CtS) ratio showed some improvement relative to preceding quarters. The 88.22% recorded (Q1: 89.49%, Q2: 88.29%) means gross margin came in slightly higher at 11.78%, albeit lower in absolute terms (NGN8.37 billion) as a result of softer revenue. Overall 9M:2019 gross margin printed at 11.31%, with gross profit at NGN25.10 billion (9M:2018: 13.65%, NGN30.97 billion). This is justified by the fact that landing costs remain elevated on the back of higher freight costs, despite lower oil prices. Operating Expenses constituted a major drag on earnings –up 15.60% to NGN6.86bn for Q3.

In just 9 months, OPEX is up 16.46% to NGN20.72 billion, due to unwieldy administrative costs (primarily Staff Costs and “Technical Assistance & Management Fees”). While we understand that TOTAL Nigeria pays for Technical Assistance from it French parent company, TOTAL SÁ, a key sticking point is how this cost item logged a humongous 97.92% upsurge (+NGN1.02 billion) in a single quarter. Finance costs have been a snag for most of the year. In 9M, TOTAL incurred NGN6.15bn on NGN53.87bn of borrowings (+103.34% Y-o-Y), principally bank overdrafts worth NGN45.97bn for the network segment. Pre-tax loss settled at -NGN0.12 billion (9M:2018: NGN11.44 billion). Net Income also declined by 102.67%, pitching in at -NGN0.20 billion (EPS: -NGN0.60 vs. NGN22.58 previously).

Earnings Quality Takes a Further Hit

In Q3, TOTAL recorded a 11.09% (+NGN6.37 billion) uptick in its receivables balance to NGN63.84bn, which calls to question the suitability of its credit policies. Operating Cashflow steeped further into negative territory (-NGN7.38 billion vs. -NGN5.19 billion in 9M:2018) on the back of a 14.48% surge in inventories, and the increasingly uncontrollable receivables balance.

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Outlook and Recommendation

For the first time in its history, TOTAL might be declaring a full-year loss. What is even more excruciating is that TOTAL will also fail to pay a dividend for the first time in its 40-year listing on the NSE, except the company decides to dip into retained earnings (failure to declare an interim dividend is already clear evidence of this). Earnings is expected to come in much lower at -NGN0.36 billion, (-104.54% Y-o-Y), and EPS at -NGN1.07. Due to the loss, our 2019FY target price of NGN100.48 was computed with reference to an EV/EBITDA ratio of 7.50x and full-year EBITDA of NGN11.3bn. We recommend a SELL.

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