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TOTAL NIGERIA PLC - Fairly resilient earnings for a tough FY’17

Fairly resilient earnings for a tough FY’17                                                                                           

TOTAL reported a 46% y/y drop in FY’17 profit after tax to ₦8.0 billion, translating to an EPS of ₦23.62 (FY’16: ₦43.58). However, considering the challenging operating landscape in the Nigerian petroleum downstream sector over the course of the year, we find this performance quite impressive even as the reported EPS beat our ₦18.95 expectation. We recall that FY’16 was a very strong base year, bloated by the impact of partial liberalization of the downstream sector (May 2016) and low oil prices on earnings. Notably, the Board of Directors proposed a final dividend of ₦14.00/share, taking total dividend for the year to ₦17.00 (maintaining the record year dividend paid in FY’16). Also, we highlight the improvement in TOTAL’s cash position in Q4. Drilling down into the full year line items, most of the numbers came much in line with expectation. FY’17 revenue was flat y/y at ₦288 billion (Vetiva: ₦301 billion) following a further 2% q/q decline in Q4 when fuel shortages were severe. Gross margin for the year printed at 10.2% (Vetiva: 10.0%) amidst margin cap on PMS supply from NNPC, and as strong crude oil prices in Q4 pressured cost of base oil (main input for Lubricant).                                                                                          

We maintain our erstwhile outlook on TOTAL. The company remains well positioned to maintain its long-standing dominance in the Nigeria downstream petroleum industry given its fuel distribution network even as it continues to expand its asset base (FY’17 CAPEX: ₦7.2 billion, FY’16: ₦5.4 billion). Notwithstanding, policy catalyst particularly in form of full liberalization of the sector is required to extract optimal value from these assets. With oil prices expected to remain strong in 2018, we expect PMS landing cost to remain higher than the regulated pump price band of ₦135 - ₦145/litre making it uneconomical for independent markets to import.  Hence, we do not foresee deregulation in the sector in the near term even as the 2019 general elections draw nearer. As such, we expect the current status quo in the sector to be maintained – NNPC to remain the sole importer of PMS, rationing the supply to marketers at regulated thin margins. With fuel shortages slightly worse than anticipated thus far in 2018, we cut our FY’18 revenue to ₦300 billion (Previous: ₦313 billion).