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Ardova PLC H1'21 - Lubricant margins may cushion H2 earnings

Ardova recently released its H1’21 results with revenue declining marginally by 1% y/y from ₦87.3 billion, to ₦86.8 billion, a 2% variance from our estimate. However, a 2ppt y/y improvement in gross margin, as well as better cost efficiency drove after tax profit 76% higher y/y to ₦1.8 billion (Vetiva estimate: ₦1.7 billion). On a quarterly basis, it was able to grow revenue by 27% y/y from ₦35.3 billion in Q2’20 to ₦44.8 billion in Q2’21, on the back of improved demand, as economic activity continued its gradual recovery. Evaluating revenue, sales from the lubricants business recorded the highest improvement, increasing 82% y/y as rising prices in the lubricants space supported this jump. Turnover from fuel operations also improved, growing by 19% y/y. However, the company only recorded a 3% improvement q/q, as it gradually overcomes the supply challenges from the previous quarter.

Looking ahead, as the uncertainty behind PMS pricing becomes clearer, we expect to see gradual recovery in sales volumes from fuel operations, although not reverting to Q1’20 levels. Hence, given run rates from the previous quarter, we revise our outlook on revenue from the fuel business downwards by 5% to ₦156 billion. For the lubricants business, we anticipate a further increase in sales to ₦24.7 billion (up 45%), as improving business activities, coupled with increased pricing in the space, boost sales volumes through the year. Furthermore, we predict the increased pricing in the lubricants space to remain sticky throughout the year, thus we foresee gross margin printing at 8% for the year. Meanwhile, we see operating costs trending upwards by 5% y/y; hence, we expect operating expense margin to remain at 5% y/y. Also, given Ardova’s cash position, we expect to see further borrowings in the coming quarters, thus driving finance costs higher to print at ₦1.7 billion (up 21% y/y). Consequently, this brings our net profit forecast to ₦3.1 billion for the year (2020: ₦2.1 billion).