Fairly resilient earnings for a tough FY’17
- EPS slumps y/y but still ahead of estimate
- Final dividend of ₦14.00/share takes total dividend to ₦17.00/share
- Full liberalization remains the biggest upside to earnings
- FY’18 earnings to normalize, valuation supported by strong cash flow
EPS slumps y/y but still ahead of estimate
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).
Full liberalization remains the biggest upside to TOTAL earnings
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).
FY’18 earnings to moderate, valuation buoyed by strong cash flow
We expect to see normalizations across a number of line items in TOTAL’s FY’18. As earlier highlighted, Selling & Distribution came in quite low given historical trend, the current level of sales as well as inflationary pressures during the year. As a percentage of sales, the expense line printed at 0.9% for FY’17 vs the average 2.0% in the last five years. We have taken a conservative stance in estimating the expense line going forward and thus forecast FY’18 at 1.7%. Also, Other Income of ₦3.9 billion consists of some items which we do not see as recurring items – Reversal and re-measurement of FX forward contract (₦1.6 billion), FX gains (₦1.0 billion) and Gains on PPE (₦0.1 billion). After adjusting for non-recurring income from FX transactions and gains from asset disposal, we forecast Other Income of ₦2.1 billion for FY’18. Also, we do not expect the ₦1.9 billion from “Forex differential on Petroleum Subsidy Fund (PSF)” recognized in Q3’17 to re-occur, hence we exclude this from our forecast going forward. With improving operating cash flow, we expect the oil marketer to be less dependent on overdraft financing over the course of the year. As such, we revise our FY’18 Net Finance cost to ₦2.3 billion (Previous: ₦2.6 billion). After updating our model, we revise our FY’18 PAT lower to ₦3.9 billion (Previous: ₦4.7 billion). Largely buoyed by the strong improvement in cash position however, we have revised our Target Price to ₦258.67