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TOTAL NIGERIA PLC FY'19 - Better margins, debt cut to buoy FY’20 earnings

Border closure to weigh on fuel supplies in 2020

As expected, TOTAL’s Q4’19 fuel segment posted a decline of 18% y/y to ₦58.1 billion (Vetiva estimate: ₦58.4 billion), taking FY’19 sales to ₦239.7 billion (-7% y/y). We attribute the performance in Q4’19 fuel turnover to seemingly lower imports of petroleum products by the NNPC, following the move by the federal government to close all land borders. With the expectation of the borders remaining closed for most of H1’20, we foresee a further moderation in imports of fuels. Thus, we envisage that FY’20 fuel turnover will come in lower at ₦226.3 billion (-6% y/y).

 

Stiff competition caps lubricants growth to a single digit

Despite heightened competition in the lubes space, TOTAL’s lubricants operations reported a modest performance in Q4’19, with revenue from the segment climbing 4% y/y to ₦11.0 billion. This, however, underperformed our estimate of ₦13.4 billion. Overall, FY’19 lubricants sales recorded a single-digit growth of 4%, coming in at ₦51.2 billion (Vetiva estimate: ₦53.5 billion). In FY’20, given the aggressive drive by other industry players (notably FO and MOBIL) to further expand their market share, we forecast a conservative growth of 2% in TOTAL’s lubricants revenue to ₦52.3 billion and project a CAGR of 3% over the next four years.

 

Balance sheet deleveraging to support bottom line in 2020

In Q4’19, TOTAL significantly deleveraged its balance sheet, as the company trimmed its bank overdraft to ₦35.9 billion from ₦53.9 billion as of 9M’19. As a result, finance costs fell 22% q/q to ₦1.7 billion (Vetiva estimate: ₦2.1 billion). We believe the cut in bank overdraft was funded by the significant jump in operating cash flows, which improved to ₦16.9 billion in Q4’19, a U-turn from a negative balance of ₦7.4 billion as at 9M’19—we specifically note that receivables fell by ₦17.3 billion during the quarter. Following comments from management at our last corporate visit, we expect a further cut in TOTAL’s debt portfolio, as management aims to reduce the company’s exposure to bank overdraft. With our projection for FY’20 operating cash flows at ₦14.4 billion, we expect the firm’s debt balance to decline to ₦29.9 billion, bringing finance charges lower to ₦5.6 billion (-29% y/y) in FY’20.