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Mobil Oil Nigeria Plc - Higher PMS price buoys earnings

• Coming off an already impressive Q1 and in line with industry trend, MOBIL reported strong growth in Q2’16 earnings with annualized FY’16 EPS of N28.84 tracking well ahead of Vetiva (N16.13) and Consensus (N16.80) estimates. Q2 revenue (3 months to June) was up 22% q/q, buoyed by the 67% increase in PMS prices following the liberalisation of the market in May. The results show margin improvement, with gross margin up 2.3 percentage points q/q to 19.2% (H1’16: 18.1%) whilst EBIT margin rose from 11.8% in Q1 to 13.7% in Q2 (H1’16: 12.9%) as the benefit of the price increase fed through. MOBIL’s Property business continues to rake in steady income with a pre-cost contribution of N2.5 billion for the 6 months, in line with our estimate.
• Following the earnings outperformance, we have raised our estimates to reflect the Q2 run rate. Our FY’16 revenue is now revised upward to N109 billion (Previous: N86 billion) whilst EPS is raised to N25.50 (Previous: N16.13). DPS is raised from N11.29 to N17.85 (11% yield). We have equally raised our EPS through 2020 by an average 45% to further reflect the liberalized environment. In our view, the liberalisation of the Downstream market has improved the scope for Majors to boost earnings in the near term. The biggest risk we see is their ability to source foreign exchange at rates that keep margins attractive. We think that in the event of a much larger than expected depreciation of the local currency, PMS prices would need to be reviewed above the prescribed upper limit of N145/litre. The CBN Governor, at the May MPC meeting said that the PPPRA template which delivered the N145/litre price has been configured to accommodate exchange rates as low as NGN/USD 302 (Current rate NGN/USD 311).