FREE

ARDOVA PLC FY'20 - Revived subsidy regime will bite 2021 margins

Recently, Ardova Plc released its 2020 audited results, which showed that the company grew its revenue 3% y/y to ₦181.7 billion, beating our estimate of ₦172.4 billion, as fuel demand posted stronger recoveries than we had anticipated in the fourth quarter. Despite heightened inflationary pressures witnessed last year, Ardova made some strides in improving operational efficiency, as operating expenses for the year dropped 13% y/y to ₦9.2 billion, bringing opex margin down to 5% from 6% a year ago. After-tax earnings, however, slumped 47% y/y to ₦2.1 billion (Vetiva: ₦3.1 billion), as gains from asset disposal and subsidy-related income strengthened 2019 base. On a normalised basis, PAT for the year surged 47% y/y despite pandemic-driven challenges.

In light of the recent pricing development in the downstream sector, we have revised our 2021 expectations for Ardova. Initially, we had expected PMS deregulation to translate to higher margins for Ardova in 2021, which largely drove our previous PAT forecast of ₦5.9 billion (2020: ₦2.1 billion) for the year. However, while crude prices are currently well above $60/bbl and landing cost of PMS greater than ₦190, the retail pump price of PMS has remained unchanged at ₦165-170 per litre, indicating the return of a subsidy regime in PMS transactions. On this note, we expect to see a replay of 2018-2019 through the year and expect margins to be battered to thin levels. Going by our projections, we expect Ardova’s 2021 gross margin to come in at 6% (previous: 10%). Driven by higher fuel prices as well as further recoveries in fuel demand amid improvements in economic activities, we see 2021 fuel turnover for the year increasing 24% y/y to ₦198.2 billion (previous: ₦169.9 billion), while we expect lubricants revenue to grow 17% y/y to ₦19.9 billion (previous: ₦17.8 billion), taking aggregate gross profit 13% higher y/y to ₦13.6 billion (previous: ₦17.9 billion). Given increased borrowings in Q4’20, we see net finance costs rising 18% y/y to ₦1.3 billion (previous: ₦364 million). Altogether, we have lowered our forecast for net profit to ₦2.1 billion (previous: ₦5.9 billion), a 3% growth y/y.