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TOTAL NIGERIA PLC 9M'17 Earnings - In need of a policy catalyst

TOTAL’s 9M’17 earnings continue to reflect the tough operating environment of the Nigerian petroleum downstream sector. The company’s already thin gross margin trimmed further in Q3’17 to 9% (Q2’17: 10%, Q1’17: 11%), likely pressured by lower diesel prices (down 12% q/q) even as margins on Premium Motor Spirits (PMS) remain regulated. With operating expenses still elevated, EBIT for the quarter more than halved q/q to ₦1.6 billion – leading to a 9M’17 figure of ₦9.6 billion (down 44% y/y despite a ₦2.6 billion income from FX gains). Further weighed by a higher effective tax rate (38% vs 32% last year), 9M’17 PAT was 49% lower y/y to ₦6.0 billion. The Board of Directors declared interim dividend of ₦3.00/share, lower than the ₦7.00/share declared last year.                                                     

We believe TOTAL is well positioned to benefit from the medium to long term value in the petroleum product retailing business, as it controls the largest fuel distribution network in the country. However, we highlight that the biggest upside for the sector remains full liberalization of the Nigeria petroleum downstream sector. Guided by this, we expect revenue from the Petroleum product segment to remain sticky and forecast a modest 2% q/q rise to c.₦68.7 billion – supported by expected improvement in economic activities. Our near term annual growth forecast is a mild 3% amidst policy uncertainty in the industry. Together with the Lubricant segment, we forecast FY’17 revenue at ₦300.6 billion, representing a 3% y/y growth. We estimate FY’17 EBIT at ₦11.3 billion, significantly lower than the ₦20.9 billion recorded in FY’16, and PAT at ₦7.3 billion (FY’16: ₦14.8 billion). Amidst policy uncertainty clouding the earnings growth prospect of the downstream sector, we value TOTAL at ₦230.11/share.