Total Nigeria PLC – Better Margins, Debt Cut To Buoy FY’20 Earnings

Total Nigeria
  • FY’19 fuel sales down 7% y/y
  • Lubricants operations grow 4% y/y
  • Bank overdraft declines to ₦35.9 billion (9M’19: ₦53.9 billion)
  • Target price revised to ₦198.12 (previous estimate: ₦197.26)

On Wednesday, TOTAL released its unaudited FY’19 results, reporting a 6% y/y drop in turnover to ₦291 billion (Vetiva estimate: ₦294 billion). Meanwhile, after-tax earnings came in at ₦2.4 billion (-70% y/y) for the full year, mainly supported by gains (₦2.7 billion) on asset disposal recorded in Q4’19.

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 underwhelming 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

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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 the management aims to reduce the company’s exposure to a 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.

2020 ROE to improve to 14% (FY’19: 8%)

We are somewhat optimistic about TOTAL’s bottom line this year, despite our anticipation of a drop in turnover to ₦278.6 billion (-4% y/y). For instance, we expect the improvement in gross margin, stemming from anticipated higher lubricants contribution to revenue mix, to take gross profit to ₦35.7 billion (+5% y/y). More so, we project a 6% y/y decrease in SG&A in FY’20, moving in tandem with turnover. Additionally, we project a surge in FY’20 profit before tax to ₦5.9 billion (FY’19: ₦3.7 billion), supported by our expectation of a 29% y/y drop in finance costs. Overall, we expect after- tax profit to come in at ₦3.9 billion (+63% y/y), translating to a ROE of 14% (FY’19: 8%).