EUR 3.72 For Business Accounts Only

Total Nigeria Plc - Total remains attractive despite subsisting risk

• In this note, we update our views on Total Nigeria Plc. (TOTAL NL) as we take account of recent weakness in the company’s share price (-12.04% YTD)—despite rally in the equities market—and roll forward our valuation model to FY 2017.

• Since our last update, Total’s share price has been flat relative to last closing price, though the stock has declined to a low of N249/share, which we consider fair in context of salient downside risks to the stock. That said, while we note the downside risk, we think they are limited at this level and believe the stock is cheap enough to justify our BUY rating. Our recommendation is based on a revised target price of N368.54/share (from N384.72/share), which represents an expected total return of 40%. We revise our forecast to reflect recent developments including: (1) appreciation in the FX parallel market; (2) increase in diesel and lubricant prices; and (3) higher cost on the deregulated segments. 

• Cost pressure mask Q1 earnings: From its Q1 17 numbers, revenue expanded 34.8% YoY (+13.8% QoQ) to N80.5billion (Q1 17E: N75.7billion) reflecting price induced growth in the turnover of the petrol (+30.4% YoY) and lubricants (+63.1%) segments respectively. However, input cost (+40.6% YoY to N71.5billion) tracked faster, than our expectations (Q1 17E: N60.4billion) and top-line, dragging gross margin to an eight-quarter low of 11.2% (-3.7pps YoY). Parsing through the numbers suggest cost pressure was evident in the petroleum product segment (+41.3% YoY to N62.2billion) linked to the general trade section. Pertinently, despite spiralling cost on the back of naira weakness for most part of the quarter, the largely contractual nature of the general trade section strapped Total into incurring higher cost in supplies without being able to pass-on cost to its corporate customers. Notwithstanding flattish cost at the OPEX line (+0.7% YoY), the combined impact of spiralled cost and higher net finance charges (+28.6% YoY) drove EPS 5.4% lower YoY to N7.87.

• Earnings remains upbeat but replicating 2016 is a tough call: Over FY 17, we expect overall top-line +8.5% YoY (to N315.6billion) to remain buoyed by higher YoY PMS prices (2017 projection: N145/litre vs. N123/litre for 2016) and increment in lubes prices, irrespective of our projections for weaker petrol volumes (-8% YoY to 1.6billion litres). On cost, notwithstanding recent NGN appreciation at the parallel market which should ordinarily moderate input cost, our average crude oil price estimate (22% YoY to $55/bbl.) and expected 2017 FX rate (+18% to N360/$) should leave COGS at elevated levels. Consequently, gross margin should come in 90bps lower YoY at 16.0%. The foregoing should combine with higher net finance charges (+24% YoY to N717million), reflecting absence of payment of accrued interest on delayed subsidy, to drive our FY 17 EPS to N35.11 (-19.4% YoY) with total dividend at N17.56 (assuming a 50% pay-out).
  

• Total has had a good run over the last one year and currently trades at a P/E of 6.1x relative to 13.6x for peers. We lower our FVE to N368.54 (from N384.72) using the same valuation methodology and parameters as previously, namely a 70:30 weighting for DCF and relative valuation. We retain a BUY rating on the stock given 40% upside from last closing price of N263/share