Lubes Maintain Prime Status
11 Plc’s (MOBIL) 9M:2019 scorecard has distinguished it apart from its peers – for its ability to consistently grow topline in a year with grim operating conditions. Relative to 2018, gross revenue added an impressive 13.17%, to print at NGN141.51 billion. While overall contribution as at 9M was only 18.73% (NGN26.50 billion), the lubricants segment remained as pivotal as ever to MOBIL’s revenue growth (+14.90% Y-o-Y). The Fuels segment also consolidated its recovery; 9M:2019 Fuel sales expanded by a sizeable 11.83% to pitch in at NGN114.04 billion (9M:2018: NGN101.98 billion).
Nevertheless, the segment’s overall contribution came in lower, as other business lines picked up. Growth in LPG retail was similarly sustained; MOBIL has made NGN0.97 billion this year alone, contributing 0.68% to overall revenue (9M:2018: 0.00%). MOBIL is strategically positioned to take advantage of the burgeoning cooking gas market and is putting NIPCO alliance (which has a strong market presence within this segment) to good use in driving volumes.
[READ MORE: MOBIL’s tepid recovery stirs optimism]
Standalone Q3:2019 revenue was up 24.47% to NGN48.71 billion (vs. NGN39.13 billion in Q3:2018 and NGN46.73 billion in Q2:2019), driven by expansion in Lubricants (+26.41%; NGN9.16 billion) and Fuels (+22.90%; NGN39.19). LPG sales also grew 13.75% (+NGN0.36 billion) Q-o-Q. It is no longer realistic to expect a PMS price hike in 2019, but our outlook on the MOBIL’s topline growth, however, remains upbeat, on the back of lubes and other white products. 2019FY revenue growth is now expected at 16.43% (NGN191.65 billion).
Direct Costs Persist as a Key Pressure Point
In Q1, direct costs were at their highest – 92.80%. While this tapered to 91.67% in Q2, it picked up again in Q3, printing at 91.91% – a mirror of the challenges industry operators have with landing costs. Consequently, overall Cost-to-Sales as at 9M:2019 was 91.89% (NGN130.03 billion). For context, the ratio was only 89.78% (NGN112.26 billion) in 9M:2018. Operating expenses have been muted but ticked up by 34.53% (+NGN0.72 billion) in Q3 on the back of higher selling costs. Operating profit, therefore, contracted by 15.23% to NGN9.54 billion – a margin of 6.74% (9M:2018: 9.00%). Pretax profit and net income were also strained by higher finance costs and settled at NGN9.40 billion (- 19.27%) and NGN6.34 billion (-19.41%) respectively, implying a net margin of 4.48% (EPS: NGN17.59).
Rental Income Remains the Shock Absorber
It is a renowned fact that MOBIL’s property business provides a solid buffer for its margins. In 9M:2019, rental income constituted 40.16% (NGN2.55 billion) of overall net income. For context, net margin would have been 2.68% without this key business segment. While this is higher than the 34.13% contribution for 9M:2018, it is lower in absolute terms by 5.16% (9M:2018: NGN2.69 billion). Having grown at a CAGR of 38.06% since 2015, we maintain our stance that rental income will remain the key profit driver for 2019FY, even though it is a non-core part of the business.
Higher Payables prop up operating accruals
As at 9M:2019, operating cashflow improved to NGN15.95bn (9M:2018: NGN4.45 billion) – dwarfing net income, as MOBIL recorded a substantial uptick in trade & other creditors (+140.73%).
Outlook and Recommendation
MOBIL has sustained the recovery that kickstarted in Q2, even though we maintain that there is ample room for progress. We are banking on further expansion in lubes and LPG to consolidate the positive momentum, but still expect a Y-o-Y contraction in net income by 10.34% (vs. previous expectation of -13.91%) to NGN8.36bn. 2019FY expected EPS is now NGN23.19, and with a target PE of 6.85x, we have a target price of NGN158.83, an upside of 7.39% to the current share price of NGN147.90 and a 4.11% premium to our previous target price of NGN152.56. We maintain a HOLD recommendation.
NSIA records total comprehensive income of N36.15 billion in 2019
The NSIA recorded an increase in total assets to N649.84 billion at the end of the financial year.
The Executive Director, Nigeria Sovereign Investment Authority (NSIA), Stella Ojekwe-Onyejeli, announced in a virtual briefing to newsmen on Friday that the NSIA recorded a Total Comprehensive Income (TCI) of N36.1 5 billion in 2019.
She revealed that the 2019 income was less than the TCI for 2018, which was N44.34 billion. However, the NSIA recorded an increase in total assets to N649.84 billion at the end of the financial year, as opposed to that of 2018 which closed at N617.70 billion.
Ms Ojekwe-Onyejeli said that TCI income for 2019 included foreign exchange gains at N1.26 billion compared to N18.05 billion in 2018, noting that the gain in forex was due to changes in Nigeria’s official exchange rate from N305 to a dollar to N325.
“As of year-end 2019, NSIA’s core capital remained at 1.5 billion dollars.” She said. “The Authority continues to manage 3rd party funds on behalf of some government institutions. We currently manage funds for the Debt Management Office (DMO) and the Ministry of Finance.
“For DMO, the current value of Assets under Management (AuM) is 124.03 million dollars. For 2018, this fund stood at 122.60 million dollars in AuM.
“For the Nigeria Stabilisation Fund, managed on behalf of the Ministry of Finance, the Fund Balance was N33.365 billion. As of 2018, this balance increased to N20.814 billion.”
“However, the National Economic Council voted for an additional capital contribution of 250 million dollars in 2019, which was received on April 8,” she explained.
She added that the group’s strategy to invest in diversified products across the yield curve provided returns and that the Stabilisation Fund (SF), which had been fully invested by the end of 2019, returned 5.81%, outperforming its benchmark by 381 basis points.
She also stated that the Future Generations Fund (FGF), deployed by the NSIA across multiple global equities, hedge funds and other diversifiers, returned 6.45% at the end of 2019, outperforming its benchmark of 6.43%.
“As of year-end 2019, we had deployed over 90 percent of the capital in the Future Generations Fund,” she said.
Sterling Bank’s earnings to remain pressured but valuations still attractive
We project Pre-tax Profit of N9.0bn (down 15% y/y) and we estimate ROAE of 6.9% in 2020e (FY 2019; 9.8%).
Sterling Bank’s Q1 2020 numbers were largely impacted by the regulatory-induced fee cut on e-banking transactions resulting in a decline in Net Fee and Commission (down 16% y/y) and weak operating efficiency given the higher growth in OPEX (up 8% y/y) compared with the increase in operating income (up 3% y/y). Net Interest Margin (NIM) however improved to 7.7% in Q1 2020 (Q1 2019; 7.4%) on the back of lower funding cost (5.1% in Q1 2020 compared with 6.6% in Q1 2019).
Sterling bank’s NPL ratio declined to 2.0% in Q1 2020 from 8.9% in Q1 2019 following the declassification of exposures in stressed sectors. We do not expect asset quality issues to crystallise in the short term, as we expect the bulk of the loans in the Oil and gas upstream/midstream (c.27% of gross loan) to be restructured. We however expect earnings to weaken in 2020, due to low asset yields amidst weak loan creation and the downward adjustment in fees on e-banking transactions. We Project Pre-tax Profit of N9.0bn (down 15% y/y) and we estimate ROAE of 6.9% in 2020e (FY 2019; 9.8%).
Following the downward revision to our 2020 earnings forecast, we have revised our target price downwards to N1.67/s from N2.84/s previously. We however maintain our BUY recommendation due to attractive valuations (P/E; 3.7x and P/B; 0.3x) and the 34% upside from the last closing price of N1.25/s. We note that the steep decline in the stock price (down c.37% since the start of the year) presents an attractive entry point.
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Covid-19: Guinness Nigeria warns investors its results will be bad
Guinness’ financing cost rose by 97 % to N3.582 billion compared to N1.817 billion recorded in 2019.
Guinness Nigeria Plc, on Wednesday, informed the public in a statement to the Nigerian Stock Exchange, about the material circumstances that will impact its full-year financial results for 2020.
Excerpts of the report are as follows;
- The adverse impact of the sharp contraction in economic activities and the knock-on effect of the COVID-19 lockdown took a toll on the on-trade segment of the business across all our markets. Production and revenues have thus been negatively affected.
- Guinness Nigeria carried out a comprehensive review of its asset base and made a strategic decision to impair a certain category of assets, which were generating suboptimal returns. This is in line with the company’s long-term strategy of delivering value to shareholders.
- Due to a combination of the impact of COVID-19 and the asset impairment, we expect the profitability of the Company for the Financial Year to 30th June 2020 to be impacted. The Company’s balance sheet however remains strong, and this gives the Board the confidence that the Company has the right resources to continue to deliver the strategy.
Recall that Guinness Nigeria Plc reported revenue of N96.08 billion for the nine months that ended March 31, 2020, showing a fall of 5.3% compared with N101.40 billion recorded in the corresponding year of 2019.
In addition, financing cost rose by 97% to N3.582 billion compared to N1.817 billion recorded in 2019. Guinness Nigeria PLC ended the period with a profit after tax of N1.672 billion, plunging by 60% from N4.252 billion recorded in 2019.
This report has further dampened investors’ moral as its share price plunged to an all-time low of N14.20. As at the time this report was drafted, the company’s market capitalization was N32.199billion, with earnings per share standing at 1.18.
However, its price to book ratio, which is valued at 0.3571 and a dividend yield valued of 10.38% showed the stock was highly undervalued and had great potential in the long term.
You may download Guinness Nigeria’s notification of material circumstances by clicking here.