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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.

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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%).

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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.

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