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ARDOVA PLC H1'20 - Sales volume recoveries will boost H2 performance

Ardova Plc recently released its H1’20 results, with revenue growing 5% y/y to ₦87.3 billion, 2% below our estimate. However, after-tax profit fell 81% y/y to ₦1.0 billion (for context, we note that one-off income lines such as subsidy-related income and gains from asset disposal boosted H1’19 earnings after tax to ₦5.5 billion). On a quarterly basis, Ardova’s topline dipped 12% y/y to ₦35.3 billion, as the coronavirus-induced lockdowns in Lagos and a few other states in April weighed on sales volumes across all the company’s business operations during the quarter. For instance, sale of fuels, the largest contributor to topline, dropped 12% y/y and 34% q/q to ₦31.7 billion (Vetiva estimate: ₦33.4 billion). Also, lubricant operations posted a 17% y/y decline in sales to ₦3.6 billion (Vetiva estimate: ₦3.9 billion). With the onset of a market-reflective price regime for Premium Motor Spirit (PMS) in March, Q2’20 gross margin edged higher to 7% (Q2’19: 6%); however, gross profit remained almost flat at ₦2.6 billion (Q1’19: ₦2.5 billion), dragged by the revenue slide. Ardova Plc recently released its H1’20 results, with revenue growing 5% y/y to ₦87.3 billion, 2% below our estimate. However, after-tax profit fell 81% y/y to ₦1.0 billion (for context, we note that one-off income lines such as subsidy-related income and gains from asset disposal boosted H1’19 earnings after tax to ₦5.5 billion). On a quarterly basis, Ardova’s topline dipped 12% y/y to ₦35.3 billion, as the coronavirus-induced lockdowns in Lagos and a few other states in April weighed on sales volumes across all the company’s business operations during the quarter. For instance, sale of fuels, the largest contributor to topline, dropped 12% y/y and 34% q/q to ₦31.7 billion (Vetiva estimate: ₦33.4 billion). Also, lubricant operations posted a 17% y/y decline in sales to ₦3.6 billion (Vetiva estimate: ₦3.9 billion). With the onset of a market-reflective price regime for Premium Motor Spirit (PMS) in March, Q2’20 gross margin edged higher to 7% (Q2’19: 6%); however, gross profit remained almost flat at ₦2.6 billion (Q1’19: ₦2.5 billion), dragged by the revenue slide.

H2 volume upticks to drive topline growth 

Given that the downstream industry is predominantly characterized by little or no product differentiation, we view Ardova’s Q2’20 performance as impressive, as other notable industry players have turned in losses amidst the pandemic shock. Looking ahead, we anticipate a much better performance in the second half, as we believe the continual relaxation of social distancing restrictions, especially in Lagos, would lead to significant recoveries in sales volumes in the coming quarters. More so, we see further upticks in gross margin, as the government continues to maintain a wider spread between the ex-depot and selling prices of PMS, compared to 2019 levels. That said, we have revised our 2020 estimates for Ardova’s performance to reflect the misses in Q2 and our expectations for H2. Firstly, our 2020 projections for fuel and lubricant sales have been revised to ₦165.9 billion (2019: ₦159.2 billion) and ₦16.0 billion (2019: ₦17.2 billion) respectively. Furthermore, we have trimmed our forecast for operating expenses-to-sales ratio to 5% (2019: 6%), bringing operating profit to ₦4.9 billion, flat y/y. All in, we see Ardova reporting a net profit of ₦3.3 billion in 2020 (2019: ₦3.9 billion).