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Total Kenya Plc (NSE: TOTL) 1H18 Earnings Note

Total Kenya Plc (NSE: TOTL) announced its 1H18 results posting a 7.7% y/y growth in EPS to KES 1.64 from KES 1.52 in 1H17. The improvement in EPS was despite a dip in Gross sales (-46.8% y/y), other income (-17.2% y/y) and interest income (-11.1% y/y). We attribute the decline in Gross sales to lower participation in the low margin Open Tender System (OTS) business, due to improvement in gross margin to record levels - 9.3% from 7.2% in 1H17. Operating expenses remained mute at KES 2.98Bn compared to KES 2.99Bn in 1H17 indicating prudent cost management by the company. Notably, margins improved y/y with operating and net margins up 40bps and 72bps, respectively.  Forex income of KES 34Mn reversed a forex loss reported in1H17 of KES 110Mn with the improvement attributed to stability of the Kenya Shilling against other currencies. Currently, Total Kenya is trading at a P/E of 10.7x against a peer P/E average of 8.5x an indication that the counter is slightly overpriced by investors

Positives:

1. 7.7% y/y growth in EPS. This can be attributed to lower tax charge for the year (KES 580Mn in 1H18 vs KES 736Mn in 1H17). Additionally, we noted reversal of the KES 110Mn foreign exchange loss reported in 1H17 to a KES 34Mn forex gain in 1H18. The forex gain was on the back of stability of the Kenyan Shilling against other currencies (mainly the US Dollar and Euro which Total denominates some of its monetary assets and liabilities or where it transacts in foreign currency) during the period compared to 1H17.

2.  Uptick in gross, operating and net margins. Gross margin increased by 210bps to 9.3% from 7.2% in 1H17. We attribute this to the firm’s lower participation in the OTS business after having shifted its strategy in 2016 from low margin to high margin business. The high gross margin is also supported by its large lubricants’ business where Total’s market share is 38.4% compared to Kenol’s 9.9%. Consequently, gross margin increased from 6% in 1H15 to 9.3% in 1H18. We expect margins to remain at current levels as Total maintains its focus on retail business to cushion their margins.
Similarly, operating and net margins improved 40 bps and 72bps, respectively, on the back of lower operating expenses due to cautious cost management by the firm.

3. A 229.2% y/y growth in cash from operations. Notably, the firm’s operating cashflows increased to KES 729Mn from KES 222Mn in 1H17. Additionally, this indicates a better working capital mix (the best current ratio multiple - 1.8x, in the past 3 years.) despite a rise in global oil prices; high crude prices tend to have a negative impact on working capital. We attribute the positive working capital partly to the low participation in OTS which often requires a significant short term funding, especially in an environment of rising oil prices, like In Kenol’s 1H18 case.  We are delighted by the good working capital management by the firm especially in the current high crude oil price environment. Since we don’t expect crude prices to go much higher from current levels (USD 74/barrel) we expect positive working capital to be maintained and low debt levels (30% debt/equity).

4. Normalised Other Income up 1.0% y/y.  Majority of the non-fuel income includes rental income, commission income, gains on disposals and doubtful debts written back. The increase was despite a one-off exceptional item of KES 78Mn relating to excess provisions and asset disposals written in 2017. Currently, other income accounts for 25% of operating income from average levels of 26%.  For 2H18, with the exceptional item off the books, we expect other income to remain steady at average 26% levels.
 

Our View:
Following employment of high margin strategy by Total in 2016, the margins have shown positive growth despite lower revenue.  This strategy is seen as the better strategy for Oil Marketing Companies (OMCs) rather than the low margin OTS. Total is also on a network expansion trend adding 8 stations between 2016 and 2018. This, coupled with a strong macro outlook for the Kenyan economy, could work in Total’s favour to deliver good FY18 results.

Currently, Total Kenya is trading at a P/E of 10.7x against a peer P/E average of 8.5x, an indication that the counter is slightly overpriced by investors. However, with a stable 2H18 outlook given a historical stronger second half, we expect to see better performance in 2H18.