EUR 3.48 For Business Accounts Only

Total Nigeria Plc - Feeling the squeeze, downgrade to SELL

• Total Nigeria Plc. (Total.NL) have sharply under-performed broader markets over the last three months. Given higher exchange rate and crude oil prices, current petrol prices have become unprofitable for the OMCs (Oil Marketing Companies). Consequently, the NNPC, the supplier of last resort, has become the sole importer of refined petrol, thus taking the under recovery from the loss incurred during importation. Ex-depot price, which our findings puts at N139/liter has put significant pressure on margins of OMCs. Admittedly, the pass-through of prices, given higher crude oil prices, would become difficult in 2018 as the election season picks up, thus hurting margins further. We therefore believe Total is at risk, given its high concentration of PMS to revenue and its pure play on marketing margin and volume dominance.
• FY result dampened by 2nd half performance: In its FY 2017 result, profit was masked by the duo of elevated cost and finance charges, which lowered earnings per share (EPS) by ~46% YoY to N62 (FY 2016: N43.58). In fact, excluding FX loss reversal of N1.6 billion and net FX gains of N993 million, and adjusting for tax, earnings would print at N15.91/share, which is 64% lower than prior earnings (77% lower YoY- excluding FX loss of N9 billion in 2016, bringing prior year’s EPS to N70.26). A large chunk of the weak earnings stemmed from lower sales and higher input cost.
• In the face of revenue decline, input cost expanded 7% YoY to N259 billion with Cost-to-Sales printing at 90% (2016: 83%). Similarly, gross margin moderated significantly to a 15-year low of 10.2% with pressure stemming from the petroleum segment which our analysis suggests Cost-to-sales for petroleum product printed at 94%.
• Elevated Finance charge supported weak earnings: Though net finance cost moderated by 18% YoY to N473 million, Total faced sizable finance charge in 2017 with interest expense expanding over four-fold YoY to N3 billion which management attributed to increase in bank lending interest rates & reduction of credit terms for PMS purchases. This is surprising in our view given that importation and volumes declined over the period. Thus, while we await clarification from the management, our analysis reveals bank overdraft more than doubled to N9 billion - average interest rate on bank overdrafts for the year was ~19.0% (2016: 14.1%). That said, N9 billion from subsidy refund (Petroleum Subsidy Fund -PSF), which drove finance income higher by 850% YoY to N2.5 billion moderated net finance cost in the period. Consequently, PBT declined by 42% to N11.8 billion while PAT moderated 46% to N8 billion. The company declared a final dividend of N14/share, bringing the full year dividend to N17/share.
• Lower volumes and margin pressure over 2018. Over 2018, starting from the top line, we expect the effect of the volumes decline to become more glaring as prices would remain stable relative to the previous year. With an estimated decline of 6% in PMS volumes to 1.3 billion litres, revenue is expected to print lower at N275 billion (-4.3% YoY). On cost, we expect the pressures seen in 2017 to persist taking the gross margin to 9.9% (-0.28pps) as the company would still have to source its products (PMS) from NNPC. Further down, operating expense is expected to go slightly higher (+1.3% YoY) buoyed higher distribution for lubricants and deregulated products. The foregoing combined with net finance cost which we forecast would increase by 1.2x to N1 billion, as the cushion effect from the outstanding subsidy payments wanes out drives our estimate for PAT lower to N7 billion (-41% YoY) with corresponding margin at 1.6%. Consequently, EPS should print at N13.8/share and DPS of N9.68 (dividend payout of 70%).
• On our estimates adjusted, Total is trading on a FY 18 P/E of 12.2x relative to current P/E of 10.24x and average P/E of peer (6.96x). We downgrade our view to a SELL (from BUY) with FVE of N93 based on downward revision to estimate.