Conoil, a stalwart in Nigeria’s oil and gas sector, has recently captured the attention of investors with its impressive share price surge.
In 2023 alone, the stock soared by 217%, reaching a new 5-year high of N112.5 per share. This surge, combined with a 20.4% year-to-date gain in 2024, has prompted investors to question the stock’s potential for delivering favorable returns at its current valuation.
The bullish momentum behind Conoil’s stock can be attributed not only to the company’s consistent positive earnings but also to broader market dynamics, particularly the removal of subsidies by President Bola Ahmed Tinubu in 2023.
This move had a profound impact on the oil and gas sector, evident in the sector index’s impressive 126% year-to-date gain in 2023.
However, the 9.98% decrease in share price following the release of its Q3/2023 unaudited results, coupled with a 10.22% decline from its 5-year high, has raised concerns regarding the sustainability of its 2023 growth momentum and the viability of investing in the stock at its current valuation levels.
Let’s explore whether Conoil, operating as an oil marketing company, is for inclusion or hold within a portfolio.
The Latest earnings in line with trend
One aspect working in the company’s favor is its consistent earnings. A cursory review of Conoil’s financial performance reveals a consistent revenue and earnings trend over the past five years with a compounded annual growth rate (CAGR) of 7.58% and 37.31%, respectively.
In 2023, Conoil sustained this growth momentum, recording an impressive 53.24% year-on-year growth in revenue to N20.387 billion, primarily driven by a 62% expansion in its white products segment, which contributed around 97% of the company’s total revenue.
However, the heavy reliance on revenue from a single product segment, such as white products, exposes the company to revenue concentration risk.
Any adverse developments or disruptions in the white products market, including changes in consumer preferences, regulatory interventions, or shifts in market dynamics, could significantly impact Conoil’s overall revenue stream and financial performance.
Furthermore, the company currently operates on a notably thin profit margin. However, it is plausible to argue that this thin margin reflects a broader sector trend, evidenced by Eterna Oil’s thin profit margin, which is even lower than Conoil’s.
High Expectations for Further Growth:
Investor interest in the oil and gas sector has persisted, driven by the expected impact from the removal of fuel subsidies last year
This positive sentiment has translated into bullish trading and positive sector performance. Conoil, alongside other oil marketing companies such as Eterna Plc and MRS Oil Nigeria Plc, have witnessed significant increase in their share prices, reflecting investor confidence and anticipation of continued growth opportunities.
With its reasonable cash reserves and steadily growing retained earnings, Conoil appears well-positioned to pursue expansion initiatives that can sustain its growth trajectory and uphold its dividend payment practices. For the past five years, the company has reliably distributed dividends, which is advantageous for investors seeking regular income.
Valuation Angle:
From a valuation perspective, Conoil’s share price is trading at a trailing twelve-month multiple of 7.78, which stands below the sector’s average multiple of 16x multiples.
This indicates that Conoil’s stock is currently trading at a lower valuation compared to its peers in the sector, suggesting a potential undervaluation.
Furthermore, its enterprise value to earnings before interest, tax, depreciation, and amortization (EV/EBITDA) ratio of 6.27 also corroborates this assessment. The alignment of the EV/EBITDA ratio with its earnings multiples suggests that Conoil may indeed be undervalued relative to its earnings potential.
Overall while Conoil’s past and recent performance and growth prospects are compelling, investors should approach the decision to hold the stock with a balanced perspective, considering both the opportunities and risks inherent in the oil and gas sector.
Disclaimer: The author(s) of this article may hold shares in, or have buying and selling intentions for, any or all of the stocks mentioned in this article. This story is for information purposes only and should not be considered as an investment advice or action. Our readers are encouraged to seek professional guidance before making any investment decisions.
Your analysis of Conoil Plc omitted an aspect some shareholders look for in a company, which unfortunately has been lacking in Conoil when the company’s history is examined.
Conoil Plc holds its AGM more than 9 months after its year-end results have been announced. So the earliest a shared can receive her dividend is October.
Meanwhile, during this period, some companies would have paid two dividends – final for the preceding year and an interim for the current year.
This must surely count against Conoil Plc.