White products maintain topline expansion 

CONOIL’s topline expansion surged further in Q3:2019; 9M:2019 revenue printed at NGN112.72 billion (vs. NGN75.84 billion in 9M:2018; +48.64%), driven by a 10.72% uptick in Q3. Q3:2019 revenue of NGN40.53bn (+89.65% Y-o-Y), is the highest recorded so far this year and was highlighted by an impressive 91.98% Y-o-Y growth in white products (PMS, AGO, ATK, LPFO and DPK). Year-to-Date, the segment has contributed 95.30% to topline which is commendable, given the mounting competition to push volumes in a difficult market. CONOIL is clearly leveraging its ubiquitous retail presence in Nigeria (395 dealers concentrated in areas of robust vehicular traffic and commercial activities) and goodwill amongst commercial vehicle operators to edge its peers in terms of sales growth. Lubricant Sales for the first 9 months is also up by 34.72% (NGN5.30 billion), albeit suffering a 5.61% Q-o-Q contraction in Q3, to settle at NGN1.79 billion (vs. NGN1.90 billion in Q2).

This is possibly a consequence of other industry operators also ramping up Lube marketing and sales, to improve depressed margins in a worsening cost environment. The LPG segment remains dormant since management took a strategic decision to shut it down temporarily in 2017 and made a commitment to restart at the earliest possible time. We think it is imperative that the reopening of this segment is expedited, for the company to participate in Nigeria’s budding transition towards LPG (for cooking) and capture further value, given its strong presence and appeal. We now expect topline growth at 26.91% in 2019FY to reach NGN155.10 billion.

Slight moderation in direct costs provide succour for margins

In contrast to most of its downstream peers, CONOIL’s Cost-to-Sales (CtS) narrowed slightly to 89.22% in Q3:2019 (Q3:2018: 90.23%). Direct costs pitched in at NGN36.14bn for the quarter (vs. NGN28.26 billion last year and NGN32.85 billion in Q2:2019), on the back of a slim improvement in White product costs. Industry players have been distressed by elevated landing costs this year (currently c.NGN225.00 per litre), with consequently pressured margins, but CONOIL has managed to keep CtS at 90.19%. Even then, costs are growing faster than revenues. (55.57%, Y-  o-Y). Currently, only TOTAL (88.69%) boasts of a better performance than the company in the management of direct costs. OPEX-to-Sales for 9M:2019 also printed lower at 6.09% (vs. 9.08% in 9M:2018), with OPEX at NGN6.86 billion.

CONOIL consolidates success despite industry worries 

Interestingly, the company’s depreciation expense ticked up by 34.29% (NGN0.40bn) despite a steady decline in the value of tangible non-current assets. Administrative expenses also increased by 20.91%, due to higher staff-related costs in the quarter. EBITDA was at NGN5.19bn, from NGN4.65bn a year ago, while operating profit also advanced by 14.25% to reach NGN4.29bn.

Pre-tax and Post-tax profits were however dragged by a 22.87% increase in overdrafts (necessitated by delays in payment of outstanding subsidy claims), as finance costs ticked up by 23.53%. After-tax earnings to date is NGN1.70 billion, implying a net margin of 1.51% (vs. NGN1.59 billion and 2.09% in 9M: 2018). 2019FY earnings is now expected at NGN2.45 billion.

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Balance sheet management can unlock superior shareholder value

In the year to date, CONOIL has improved the management of its working capital – inventories are down 8.03% y-o-y (NGN8.41 billion), receivables also declined by 25.10% (NGN22.69 billion), while defraying NGN14.89 billion (42.45%) of its payables from last year. However, the rising debts (+22.87% Q-o-Q; NGN11.95 billion) continue to pressure bottom-line. Given the sizeable cash hoard of NGN17.24 billion, we believe CONOIL can do better at managing its growing interest expenses by taking on cheaper debt to free up funds for expansion initiatives or for distribution to shareholders.

Outlook and recommendation  

With these 9M:2019 results, CONOIL has consolidated its status as the best performer in the downstream segment, even though this is currently not mirrored by stock price performance due to concerns about the company’s corporate governance. At the minimum, we envisage a dividend yield of c. 13.00% this year, and with earnings growth expected at 36.35% (NGN2.45 billion by 2019FY), implies a forward EPS of NGN3.53. Our target PE of 8.20x suggests a 2019FY Target Price of NGN28.94, with a BUY recommendation.

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