Total Nigeria Plc H2’20 – Balance sheet deleveraging will cushion H2 earnings

Total Nigeria Plc - A Tough Year Although With Few Positives
Total Nigeria Plc - A Tough Year Although With Few Positives

TOTAL recently released its H1’20 results, reporting a 29% y/y decline in revenue to ₦106.7 billion, underperforming our estimate of ₦112.8 billion.

Notably, sales of petroleum products dropped by 32% y/y to ₦83.7 billion, largely a reflection of declines in sales volumes as well as lower fuel prices. Additionally, the company’s lubricant business posted a 15% y/y drop in turnover to ₦23.0 billion in H1’20, also dragged by weaker sales volume.

Amidst the decline in turnover and weaker operating efficiency in H1’20, TOTAL recorded an after-tax loss of ₦537 million (H1’19: PAT of ₦130 million).

On a quarterly basis, TOTAL’s revenue from petroleum products fell 56% y/y to ₦26.6 billion, as the pandemic-induced lockdown in April resulted in a sharp drop in sales volume. Specifically, sales of aviation fuels declined 83% y/y to ₦1.1 billion in Q2, as both domestic and international airports were largely shut, save for non-commercial flights.

We also highlight that the cut in the price of Premium Motor Spirit (PMS) to ₦125/litre in March from ₦145/litre partly contributed to the smaller revenue recorded in Q2’20. In a similar fashion, lubricant turnover slid 27% y/y to ₦9.9 billion (Vetiva estimate: ₦10 billion), bringing total revenue to ₦36.5 billion (Q2’19: ₦73.4 billion).

Although gross margin improved to 13% in Q2’20 (Q2’19: 12%), gross profit decreased to ₦4.6 billion (Q2’19: ₦8.6 billion), largely due to the decline in turnover. Further down the income statement, TOTAL reported an operating loss of ₦1.6 billion in Q2’20 (Q2’19: operating profit of ₦2.6 billion), as operating expenses-to-sales ratio worsened to 18% from 9% in Q2’19.

However, the company reduced its debt balance to ₦31.0 billion (Q1’20: ₦37.7 billion), resulting in lower finance costs of ₦830 million (Q2’19: ₦2.0 billion) in Q2’20. Despite this improvement in finance costs, alongside an unusual Petroleum Subsidy Fund (PSF) income of ₦2.0 billion, TOTAL reported a loss after tax of ₦374 million in Q2’20 (Q2’19: PAT of ₦604 million).

Margin improvement, lower finance costs to support H2 earnings

TOTAL’s Q2’20 performance was largely dragged by the lockdown in Lagos and a few other states, coupled with the weaker operating efficiency witnessed during the quarter. Although the lockdown was lifted in May, we believe the company’s turnover will decline in subsequent quarters, as fuel demand is expected to drop y/y amid social distancing restrictions.

Based on this, we have trimmed our 2020 forecast for fuel revenue to ₦180.9 billion
(previous: ₦203.9 billion). We also lowered our projection for lubricant revenue to ₦46.0 billion (previous: ₦52.4 billion), bringing our projection for total revenue to ₦227.0 billion (previous: ₦256.3 billion).

Similarly, we lowered our projection for gross margin to 14% (2019: 12%), resulting in a gross profit of ₦31.8 billion (2019: ₦35.1 billion). Meanwhile, our forecast for operating expenses has been raised to ₦27.2 billion amidst higher inflationary pressures, while we expect finance costs to come in lower at ₦3.6 billion (2019: ₦7.9 billion), driven by further deleveraging of the balance sheet.

All in, we expect earnings after tax to come in at ₦3.1 billion (2019: ₦2.3 billion), translating to an ROAE of 11% (2019: 8%).

Vetiva Research