FREE

ARDOVA PLC Industry trends to spark earnings surge in 2020

Weaker gross margin bites Q1 earnings
In its recently released Q1’20 results, Ardova Plc grew its turnover 22% y/y to ₦52.1 billion (Vetiva estimate: ₦52.2 billion), as management continued its drive to expand the company’s footprint in the fuel space. Notably, Ardova’s fuel business reported a 25% y/y growth in Q1’20 to ₦47.8 billion, coming in line with our estimate. However, on a q/q basis, fuel turnover declined 2%, reflecting the decision of the Petroleum Product Pricing Regulatory Agency (PPPRA) to cut the regulated pump price of premium motor spirit (PMS) from ₦145/litre to ₦125/litre in March. Meanwhile, Ardova’s lubricant performance trailed our expectation for the quarter, as revenue from this segment remained relatively flat at ₦4.2 billion (Vetiva estimate: ₦4.5 billion) but showed a 4% q/q drop, bringing total revenue to ₦52.1 billion. On the other hand, the company’s cost of sales was pressured during the quarter to ₦49.3 billion, rising 25% y/y—a steeper pace than revenue growth. That said, gross profit slid 9% y/y to ₦2.8 billion following the fall in gross margin to 5% (Q1’19: 7%).

Fuel margin improvement to drive 2020 earnings growth
Ardova’s Q1 earnings were largely dragged by the 200 basis-point decline in gross margin, which was strong enough to subdue the effect of improved
operational efficiency witnessed in the quarter. Looking forward, we foresee better performance for the remainder of the year, majorly due to price
adjustments along the PMS supply chain. While we have lowered our 2020 estimate for fuel revenue to ₦180.2 billion (previous: ₦188.3 billion) largely
due to the reduction in PMS pump price to ₦125/litre, we however raised our expectation for gross margin (2020E: 10%, previous: 6%) in this business
segment. This followed the reduction in the ex-depot price of PMS to ₦108/litre (previous: ₦113/litre) by the Nigerian National Petroleum Corporation (NNPC) in May.