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Equity Report - Total Nigeria Plc - A Strong Speculative BUY

• In this note, we upgrade our FVE on Total Nigeria Plc to N28, as we now model a 24% hike in domestic petrol price to N180 per litre and increase in finance income in 2019 - following robust subsidy receivables as at H1 18. However, to adjust for the regulatory risk in the Nigerian downstream sector, we raised our equity risk premium on the stock to 8%. From a valuation perspective, Total is trading at a FY 19 P/E of 3.8x which is at a discount to its domestic peers of 8.1x.
• Beyond 2018, given that the fixed nature of retail domestic PMS price relative to the rising importation cost has pressured margins for the downstream players, we believe there is possibility of a price hike in 2019, particularly post-election. For us, applying our 2018E average crude price of $70 per barrel to the PPPRA pricing template, we think the domestic crude oil price could increase by 24% to N180 per litre, which we expect to bolster revenue. Accordingly, we expect a pick-up in the revenue with a 4- year CAGR of 5.6% between 2019 and 2022.
• The attendant impact of our modelled price hike post-election in 2019 results in gross margin improvement, with our 4-year forecast average of 14.6% (vs 12.7% between 2014 and 2017). Also, another upside for the company is the increase in finance income via the payment of its outstanding PSF receivables (N2 billion) which we now expect to come in from 2019. Net impact of these adjustments necessitated our FVE of N244.28 which offers an upside of 33.5%, translating to a STRONG BUY on the stock.
• Downside risk to our forecast is if the domestic retail price is left unchanged, leaving margins at current level.