EUR 3.72 For Business Accounts Only

Whistle blowing on a solid first quarter

• In keeping with the rave in town, we beam our equity strategy searchlight on a leading Oil Marketing Company (OMC), Total Nigeria Plc. (Total), which is scheduled to report 1st quarter earnings in the last week of April.

• Despite its striking FY 16 earnings, which was almost four-fold higher YoY with EPS at N43.58, Total’s share price has declined 9.7% YTD (post result release: -3.7%)—underperforming the broader NSEASI. In our view, the weak appetite for the stock was underpinned by the company’s disappointing final dividend announcement of only N7.00 which brought total DPS to N 17.00, with the implied pay-out ratio of 39% well behind its average of 84% over the last decade. That said, the stock is typically prone to big moves after earnings releases and can easily gap up if the numbers are as strong as expected.

• FX loss tempers solid performance in Q4: Total reported its highest gross margin on record of 24.2% (+12.2pps QoQ) in Q4 16 in line with those of its close rival (Forte Oil Plc). In our view, the upsurge reflects price increases in lubes and deregulated product segments (LPG, AGO, DPK) which more than offset weaker petrol sales. Irrespective, N9billion in other expenses mainly due to N7.4billion in foreign exchange loss moderated the impact of its record gross margin to leave EPS at N9.32 (+17.3% QoQ and +147.9% YoY). Barring the impact of the FX loss, Q4 16 EPS would have printed at N36.00 (FY 16: +489.4% YoY to N70.26).

• Price support to drive sturdy earnings: For Q1 17, we expect petrol volumes to head further south owing to higher prices and supply constraints. Specifically, we forecast a 10% QoQ decline in petrol volumes to 373million litres. That said, as with Q4 16, higher prices across petrol (67% YoY toN145/litre), diesel (60% YoY to N234.5/litre), kerosene (40% YoY to N311.56/litre), and lubricants (+18% average) as well as resilient volumes in these segments (excluding petrol) guide our Q1 17E sales of N75.7billion (+27% YoY, +7% QoQ). Consequently, our gross margin expectation for the quarter is 20.2% (+5.3pps YoY, -3.9pps QoQ).

• Further down, the flat movement in the interbank market (N305/$) and appreciation at the parallel market (+20% to N390/$[1]), compared to prior quarter, should dispel foreign exchange losses in the period. To be clear, we now see scope for FX gains on the Trade creditors line—pegged to the parallel market. This possibility notwithstanding, we take the cautious approach of discounting potential currency induced gains. Irrespective, we expect strong underlying performance over Q1 17, with an EPS estimate of N17.04 (83% QoQ and 104% YoY) leaving prospect of an interim dividend payment.

• Total has had a good run over the last one year and currently trades at a P/E of 6.2x relative to 12.9x for peers. Net adjustments to our models drive our FVE 8% higher to N384.72, which implies a 43% upside from last closing price. We retain a BUY rating on the stock.