Conoil Plc churned out weaker operating performance in H1 2020 as its revenue was hard hit amid strict restrictions on movements, particularly at the inception of Q2 2020, due to COVID-19 pandemic fears. Hence, its profit after tax (PAT) plummeted year-on-year by 67.20% to N0.34 billion – as both white products and lubricants were impacted.
We observed that performance across players in the sub-sector was also weak due to the pandemic.
Meanwhile, activity in the industry was relatively volatile in H1 2020, as FG began partial implementation of market-based pricing regime amid declining crude oil prices. Also, oil marketers are now allowed to import Premium Motor Spirit.
Going forward, we expect revenue in H2 2020 to be better than that of H1 2020 given the two-time increase in pump price to around N148.70 in August, from N123.00 in April. Amid the challenges in the sector, Conoil’s performance amongst other players was above industry average based on financial ratio analysis, hence our ‘A’ rating.
… Liquidity Challenge, Weak Performance Should be Short-lived.
In addition to the weak profitability, Conoil Plc appeared to be grappling with liquidity issues given the dwindling cash & cash equivalent assets and the rapid rise in non-trade creditors.
However, we observed that Conoil Plc is efficiently managing its liquidity challenge as it strategically exposed itself to non-interest-bearing liabilities to reduce its relatively high interest-bearing borrowings (cost of debt stood at 15.75% in H1 2020).
Borrowings and finance costs fell y-o-y by 65.36% and 62.80% to N3 billion and N0.25 billion respectively. Despite Conoil’s liquidity issues, declining revenue and possible lower profit which may lead to a cut in dividend payout in FY 2020, we recommend a ‘HOLD’ position in the expectation that the challenges should be short-lived.
We expect Conoil’s profit and liquidity to improve as the pump price rises in tandem with the rising crude oil prices and as fuel consumption grows.
Given the current partial deregulation of the Nigerian downstream sector and removal of subsidies, we note the possibility that significantly higher fuel prices could reduce the purchasing power/effective demand of the consumer.
Hence, we expect competition among oil marketers for the consumer’s wallet to also thin their profit margins in the medium to long run during which we expect players to increase their current capacity.
Our HOLD recommendation is hinged on two main factors – expected rise in pump price and sustained operating efficiency.
… As the Global Economy Continues to Improve.
Against the backdrop of improved global demand for oil amid the continued resumption of economic activities especially in China, the world’s second-largest consumer of crude oil (after the United States) which returned to growth in Q2 2020, Brent crude spiked by 134.71% to USD45.37 a barrel as at August 19, 2020, from a year low of USD19.33 a barrel as at April 21, 2020, around when the pandemic triggered an oil demand shock.
As countries continue to ease lockdown and as we expect demand for transportation fuels (for commuting, international flights and shipping) to rise.
In the August edition of its Monthly Oil Market Report, Opec forecast OECD demand for crude at 45.77mbpd in Q4 2020, higher than 44.13mbpd forecast for Q3 2020.
…And Operating Efficiency is Sustained
As already pointed out, Conoil has consistently been an efficient player in the rather low-margin Nigerian retail space and so naturally, we believe the company should record increased profitability with an increase in pump price.
Over the span of nine years (from 2011 – 2019), the downstream player, on average, outclassed its competitors (listed on the Nigerian Stock Exchange) in terms of gross profit margin (11.5% vs industry average of 9.4%) and operating profit margin (4.5% vs industry average of 4.4%).
However, the return on equity was lower at 11.6% compared to an industry average of 18.7%. This was essentially due to higher interest expenses as a significant borrower – its average debt to capital was 40.4%, higher than the industry average of 34.8%.
However, given recent efforts to lower its cost of debt (borrowings plunged year-on-year by 67% to N3.2 billion in H1 2020), and the opportunity to refinance its borrowings at the lower interest rate, we expect ensuing savings to boost its bottom line.