Ardova Plc FY’19 result – Disposal gain masks loss from discounting of promissory notes

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CardinalStone Research
Ardova Plc (ARDOVA: TP N15.88 – SELL) reported an EPS of N3.00/share (48 Kobo/share in FY’18) in its recently released FY’19 audited report. The company’s EPS was bolstered by gains from asset disposal and interest proceeds from longstanding PMS subsidy receivables
Some positives:
  • Double-digit growth in revenue (32.9% YoY) was sustained in Q4’19. This was driven by the significant traction in fuels (+33.1% YoY) and lubricants (+28.0% YoY) that trailed the addition of 32 new retail stations in early 2019.
  • We highlight the material improvement in the firm’s operating efficiency (on a year-on-year basis) since the takeover by the current management. Operating margin printed at 2.8% in FY’19 (vs 2.0% in FY’18). The contraction in rent and lease expenses (78.6% YoY), as well as muted growth in freight costs, were the major drivers of operating margin. We believe the former is the result of reduced reliance on rented spaces following the recent retail expansion
Some concerns:
  • Gross margin declined by 1.26 ppts YoY to 5.93% in Q4’19, on sustained cost pressure from the fuels business. In addition to sustained double-digit inflation, PMS depot price hovered around N117/litre in the quarter compared to N113/litre in 2018.Net Interest expense printed at N2.6 billion in Q4’19 (vs net interest income of N264.1 million in Q4’18).
  • Added to the 31.2% YoY increase in interests on bank loans and overdrafts facilities, ARDOVA booked a N1.6 billion loss that was linked to the discount of promissory notes. Going forward, interest expense pressure is likely to taper as the firm reduces reliance on overdrafts. Overdraft balance came in at N116.8 million at the end of FY’19 compared to N9.4 billion in FY’18.
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