Petroleum products sales dip q/q
In Q2’19, TOTAL’s turnover markedly slid 9% y/y to ₦73 billion, underperforming our estimate of ₦76 billion. The fall in turnover was principally driven by the 6% q/q decline in sales of petroleum products, reflecting a catch-up occurrence to lower petroleum imports by the Nigerian National Petroleum Corporation (NNPC). Given the cyclical nature in the downstream market where the third quarter usually emerges the weakest, we expect sales of petroleum products to moderate further to ₦58 billion (- 3% q/q) in Q3’19. However, in Q4’19, we expect sales from this segment to strengthen to ₦59 billion (+2% q/q), largely supported by the customary strong demand for refined petroleum commodities during the December festive season. Meanwhile, Q2’19 lubricants turnover came in flattish at ₦14 billion (+2% q/q), in line with our estimate. Looking ahead, we have revised our FY’19 revenue forecast for lubricants operations lower to ₦54 billion (previous estimate: ₦56 billion), following the stiffer-than-anticipated competition in the lubricants space.
Improved operational efficiency buoys margins
Gross margin improved to 11.7% in Q2’19 (Q1’19: 10.5%), despite higher estimated landing costs, witnessed during the quarter, as Brent prices averaged $68/bbl in Q2’19, compared to $64/bbl in Q1’19. Meanwhile, in Q2’19, TOTAL was more operationally efficient, as operating expenses-to sales ratio improved to 9.1% (Q1’19: 9.3%). Consequently, operating margin improved to 3.7%, twice the figure in Q1’19. Our revised valuation for TOTAL yields an FY’19 gross margin of 11.2% (previous estimate: 10.5%), lifted by our expectation of lower crude prices (Average Brent priceH1’19: $66/bbl, H2’19E: $64/bbl), coupled with increasing lubricants contribution to top line. We have also raised our FY’19 operating margin forecast to 2.8% (previous estimate: 2.2%).
High finance costs drag earnings
TOTAL’s Q2’19 earnings were further pressured by high finance costs which rose to ₦2.0 billion (Q2’18: ₦1 billion, Q1’19: ₦1.9 billion), resulting in a steep fall in after-tax profit to ₦734 million (Q2’18: ₦4 billion). The reported profit after tax was, however, an improvement from Q1’19 performance, where the company turned a loss of ₦604 million. In our revised valuation of TOTAL, we have lowered our turnover estimate to ₦295 billion (previous estimate: ₦311 billion). Following the surprising earnings performance in Q2’19, our estimate for after-tax earnings has been raised to ₦933 million (previous estimate: ₦89 million), riding on improved margins and anticipated operational efficiency in H2’19. As such, our target price for TOTAL has been revised slightly higher to ₦249.46 (previous estimate: ₦248.34).
Insights provided by Vetiva Research