Following our recent corporate visit to Ardova Plc (formerly Forte Oil Plc) where we discussed the operating landscape in the downstream sector and Ardova’s strategy for the year, we have revised our 2020 projections for the firm’s financial performance. Our revised forecasts yield a 2020 turnover of ₦207.1 billion, slightly ahead of our previous estimate of ₦204.5 billion. Similarly, we have raised our 2020 projection for after-tax profit to ₦4.1 billion (previous: ₦3.8 billion). That said, we have a revised 12-month target price of ₦30.86 (previous: ₦27.47) and maintain our BUY rating on the counter.
Management seeks cost containment in fuel operations
In 2019, Ardova significantly grew its turnover by 31% to ₦176.6 billion, with revenue from premium motor spirit (PMS) contributing about 70%. According to management, PMS sales volume advanced 46% to 952 million litres, consequently lifting Ardova’s market share to 21%, the second largest in the industry after Total Nigeria Plc, based on data provided by the Major Oil Marketers Association of Nigeria (MOMAN). Also, the firm grew aviation turbine kerosene (ATK) volume by 28% to 24 million litres. Meanwhile, the volume of automotive gas oil (AGO) sold during the year contracted by 9% to 107 million litres, dragged by constraints in logistics. Overall, the performance of the fuel business last year corroborated management’s mid-term plan to expand Ardova’s footprint in the downstream sector.
Akin to the surge in fuel operations, the lubricant segment posted a 26% y/y growth in the top line to ₦17.2 billion, taking the firm’s lubricant market share to 18%, second after the industry leader. This was driven by a 19% increase in lubes volume, coupled with the improvement in lubricant pricing (estimated average price- FY’19: ₦750/litre, FY’18: ₦707/litre).
As per 2020, management highlighted the possibility of slower volume growth in the fuel business, as the firm’s prime focus is on cost reduction and improved pricing along its product supply chain (especially PMS). Specifically, management plans to implement cost-cutting measures at its depots, with the aim of supporting margins over the course of the year. Based on this, we forecast a milder growth of 18% (FY’19: 32%) in fuel turnover to ₦188.3 billion (previous: ₦185.8 billion). On the lubricant front, our previous projection for turnover in 2020 remains unchanged at ₦18.7 billion (FY’19: ₦17.2 billion), as the stiff competition in the lubes sphere is expected to impact turnover growth.
Despite the marked improvement in Ardova’s 2019 revenue (up 31%), gross profit came in flat at ₦11.3 billion following the drop in gross margin to 6.4% in 2019 from 8.4% in 2018. With management seeking to tame costs at its depots, alongside anticipated softer ex-depot prices of PMS (the result of lower oil prices), we expect gross margin to advance 1.1 percentage points to 7.5% in 2020, bringing gross profit to ₦15.5 billion (up 38%). Furthermore, we envisage that the operating expense margin will stay flat at 6%, resulting in an operating profit of ₦5.7 billion (FY’19: ₦4.9 billion).
With regard to debt exposure, Ardova slashed its debt portfolio to ₦5.3 billion in 2019 from a balance of ₦18.7 billion in 2018. Despite this significant deleveraging, finance charges spiked 56% to ₦4.8 billion, inflated by a ₦1.6 billion expense on promissory notes. In 2020, we project a 79% slide in finance expenses to ₦1.0 billion, a reflection of relatively smaller and cheaper leverage. Our projection for finance costs translates to an interest coverage ratio of 5.5x (FY’19: 1.0x).
Ardova eyes LPG expansion, plans to drop sales of green products Similar to 11 Plc’s 2018 strategy, Ardova took a step to launch the liquefied petroleum gas (LPG) business in the second half of 2019, and subsequently recorded LPG turnover of ₦17 million in the fourth quarter. While the contribution of LPG operations to total revenue (FY’19: ₦176.6 billion) might seem inconsequential in the interim, we believe the prospects for growth over the long term remain strong, as the management aims to intensify the expansion of LPG operations going forward.
On the other hand, Ardova plans to discontinue the sale of its 1.5 KVA solar systems, as the target market for these green products falls short of expectations. This explains the sharp drop in sales of solar systems to ₦39 million in 2019 from ₦141 million in 2018. Nonetheless, management aims to revisit the green energy sphere in the long run through the creation of a commodity market from solar energy.
Well-positioned for a possible PMS deregulation Since 2018, Ardova has undergone considerable business restructuring, which saw the launch of Havoline lubricants products in 2018 and the disposal the Geregu power plant, the upstream business and Ghana-
based downstream operations in 2019. This left management to focus on the domestic downstream segment. As such, we have witnessed a CAGR of 47% in Ardova’s fuel turnover over the last two years. Although the downstream segment remains shackled with lean margins in the interim, we note that the gradual evolution of a low oil price era could spur the deregulation of PMS in the outer years, translating to better margins for oil marketers. That said, we believe Ardova is well-positioned to reap the benefits of a deregulated PMS market, given the firm’s current drive to expand its retail network nationwide.
Ardova trades at a discount relative to peers
Our revised projections result in a 2020 PAT of ₦4.1 billion (up 6%), yielding an ROAE of 23% (FY’19: 26%). Using a DCF valuation methodology, we arrived at a 12-month target price of ₦30.86 (BUY). Ardova currently trades at a P/E of 5.22x, offering a discount relative to its peers, Total Nigeria Plc (13.90x) and 11 Plc (5.96x).