9M’20 turnover down 32% y/y
Lubricants operations rebound 30% q/q
Finance costs down 72% y/y
Target price revised to ₦174.11
In its recently released 9M’20 results, Total Nigeria Plc reported a 32% y/y decline in revenue to ₦151.7 billion (Vetiva estimate: ₦173.4 billion), dampened by weakened demand in Q2 and Q3. However, improved gross margin in Q3 saw the oil marketer record an after-tax profit of ₦1.0 billion in Q3, bringing 9M profit to ₦500 million – an improvement from a loss position of ₦537 million as of H1’20.
On a quarterly basis, revenue from fuel operations advanced 21% q/q to ₦32.1 billion, largely supported by price increases in Premium Motor Spirit (PMS). Compared to the corresponding quarter of 2019, fuel revenue, however, fell 44%, as demand for petroleum products remains significantly shy of pre-pandemic levels.
With regard to the lubricant business, improved consumption saw Q3 turnover rebound 30% q/q to ₦12.9 billion (Vetiva estimate: ₦12.1 billion), slightly ahead of 2019 average run rate of ₦12.8 billion. That said, total revenue in Q3 came in at ₦45.0 billion (up 23% q/q).
Additionally, Q3 gross margin climbed to a multi-quarter high of 19% – the highest since 2016. Although the marked jump in gross margin was largely driven by the consistent rise in PMS prices, we also believe that the sale of cheaply acquired inventories for relatively higher prices must have contributed to margin growth. Further down the income statement, Total recorded better operational efficiency, as Q3 operating expenses-to-sales ratio dropped q/q to 15% (Q2: 17%), although higher compared to a year ago.
Having been battered by pressures from finance charges in 2019, management has embarked on a deleveraging exercise, cutting the company’s debt (mainly bank overdrafts) to ₦25.3 billion from a Q3’19 balance of ₦53.9 billion. As a result, finance expenses declined 72% y/y to
₦611 million in Q3, taking profit before tax to ₦1.4 billion, in line with our estimate of ₦1.3 billion. All in, Total turned in a net income of ₦1.0 billion in Q3, indicating a return to profitability after two consecutive quarters of losses.
Better margins, lower finance costs to drive 2020 earnings growth
We believe the positive performance witnessed in Q3 would be sustained in subsequent quarters, as the move by the government in early September to fully deregulate the downstream sector would bode well for oil marketers. On this basis, we expect gross margin to remain relatively higher than pre-pandemic levels.
Furthermore, the ongoing balance sheet deleveraging is expected to result in further contractions in finance charges, thereby supporting earnings growth. Meanwhile, we are a bit worried about revenue performance in Q4, as the recent civil unrest in some cities might weaken anticipated recoveries in fuel demand.
As such, we see Q4 turnover coming in at ₦53.2 billion, translating to full-year revenue of ₦204.9 billion (down 30% y/y). Our gross margin forecast of 15% for 2020 takes gross and net profits to ₦30.1 billion and ₦2.4 billion respectively. Altogether, our revised valuation of Total Nigeria Plc yields a 12-month target price of ₦174.11 (previous: ₦171.26; thus, we maintain our BUY rating.