Seplat Plc - Revision to Forecast
- Our deductions from Seplat Petroleum Development Company Plc. (Seplat’s) latest financial report as well as recent discussions with management underpins our view on the stock’s capacity to close the valuation gap vis-à-vis peers. Although in the near term, aside from pricing in higher crude oil prices, we maintain our stable outlook for the stock, our optimistic outlook for 2018 is reinforced. In line with this adjustment, comes the prospect for Seplat to relatively outperform its larger peers. Seplat trades at a 2018 P/CF of 1.7x compared to African peers’ and FTSE 350 Oil & Gas index of 5.5x and 12.05x respectively.
- Investment Case. Seplat is well-positioned to return to profitability by FY 17 with a sturdy footing for substantial upside in earnings in 2018F. Balance sheet deleveraging and an improving and more stable P&L premised on the company’s return to past production levels and de-risked earnings via adding a new export route to existing two routes) should give investors comfort on earnings performance over 2018. With capex also decelerating from peak levels attained between 2014-16, free cash flow is set to expand in 2018+, particularly as management guides to implementing capex plans with the primary aim of maximizing current assets.
- Key catalyst. Near term catalysts for Seplat includes its operated $1.3bilion ANOH gas and condensate project for which a final investment decision (FID) remains in place for YE 2017 as well as the planned completion of the Escravos pipeline which offers a third export route for the company. However, crude oil prices below $40/bbl. and a reappearance of insecurity in the Niger delta may trigger a downward review to earnings. That said, we have taken a conservative approach based on the downside risk to our forecast.
- Debate on pioneer status. Although Seplat has taken a conservative approach by providing for taxes despite its ongoing deliberation for pioneer tax status, we hold the view that the company is likely to call its tax allowance on capex made during the pioneer tax period, which we estimate at $98 million.
- Valuation is more compelling. We raise our FVE from N518.74 to N588.11 after reviewing our model and considering recent updates on the company’s operations, precisely its Escravos project and tax position. Against this backdrop, we place an OVERWEIGHT rating on the stock.
ARM Securities Limited is a full-service brokerage house that offers best-in-class brokerage services to local as well as foreign private and institutional investors. Formerly known as Hamilton Hammer, the Company commenced operation in 1994 and was acquired by ARM Investment Managers in 2008--an acquisition which has successfully re-positioned the company as a recognized brokerage firm in Nigeria. The Company is a dealing member of the Nigerian Stock Exchange (NSE) and is regulated by Securities and Exchange Commission (SEC). ARM Securities research team provides insightful commentaries on the Nigerian economy and its equity and debt markets using an approach which incorporates a thorough understanding of the fundamentals of the industries and companies under coverage. The research therefore adopts an integrated methodology of top-down analysis and bottom-up stock selection, which focuses on publicly quoted companies on the Nigerian Stock Exchange that are judged to offer the highest potential for earnings growth. In addition, its analysts provide periodic commentaries on a range of topical global and local issues which provide investing clients with a holistic view of the opportunities and risks in today’s financial market landscape.
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