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ARDOVA PLC - On course to return sustainable value

Following our recent corporate visit to Ardova Plc (formerly Forte Oil Plc) where we discussed the operating landscape in the downstream sector and Ardova’s strategy for the year, we have revised our 2020 projections for the firm’s financial performance. Our revised forecasts yield a 2020 turnover of ₦207.1 billion, slightly ahead of our previous estimate of ₦204.5 billion. Similarly, we have raised our 2020 projection for after-tax profit to ₦4.1 billion (previous: ₦3.8 billion). That said, we have a revised 12-month target price of ₦30.86 (previous: ₦27.47) and maintain our BUY rating on the counter.

Management seeks cost containment in fuel operations
In 2019, Ardova significantly grew its turnover by 31% to ₦176.6 billion, with revenue from premium motor spirit (PMS) contributing about 70%. According to management, PMS sales volume advanced 46% to 952 million litres, consequently lifting Ardova’s market share to 21%, the second largest in the industry after Total Nigeria Plc, based on data provided by the Major Oil Marketers Association of Nigeria (MOMAN). Also, the firm grew aviation turbine kerosene (ATK) volume by 28% to 24 million litres. Meanwhile, the volume of automotive gas oil (AGO) sold during the year contracted by 9% to 107 million litres, dragged by constraints in logistics. Overall, the performance of the fuel business last year corroborated management’s midterm plan to expand Ardova’s footprint in the downstream sector. Akin to the surge in fuel operations, the lubricant segment posted a 26% y/y growth in top line to ₦17.2 billion, taking the firm’s lubricant market share to 18%, second after the industry leader. This was driven by a 19% increase in lubes volume, coupled with the improvement in lubricant pricing
(estimated average price- FY’19: ₦750/litre, FY’18: ₦707/litre).

Ardova eyes LPG expansion, plans to drop sales of green products
Similar to 11 Plc’s 2018 strategy, Ardova took a step to launch the liquefied petroleum gas (LPG) business in the second half of 2019, and subsequently recorded LPG turnover of ₦17 million in the fourth quarter. While the contribution of LPG operations to total revenue (FY’19: ₦176.6 billion) might seem inconsequential in the interim, we believe the prospects for growth over the long term remain strong, as management aims to intensify the expansion of LPG operations going forward. On the other hand, Ardova plans to discontinue the sale of its 1.5 KVA solar systems, as the target market for these green products falls short of expectations. This explains the sharp drop in sales of solar systems to ₦39 million in 2019 from ₦141 million in 2018. Nonetheless, management aims to revisit the green energy sphere in the long run through the creation of a commodity market from solar energy.