…Adjusted EBIT Up 46% y/y
In its recently released FY-2020 audited financials, ARDOVA Plc (“ARDOVA” or “the Company”) reported a 3.1% y/y growth in revenue, printing at N181.9bn, from N176.5bn in FY-2019.
Revenue growth was driven by increased sales of petroleum products, which grew by 3.4% y/y in FY-2020. Cost of sales grew at a slower pace, up 2.6% y/y to N169.7bn in FY-2020. As a result, gross profit recorded a decent 12.1% y/y growth to print at N12.1bn in FY-2020.
However, Operating income dropped by 16.0% y/y to N4.1bn, largely driven by the 2019 high base due to gain on disposed assets recorded. As such, Profit before tax and Profit after tax declined by 37.6% and 52.6%, to N2.9bn and N1.8bn, respectively, in the period under review. Earnings per Share (EPS) fell 52% to N1.4 per share in FY-2020.
The firm proposed a dividend of N0.19 per share. We review our forecasts for the company and present our outlook below.
Reasonable growth despite tough operating environment In 2020, the economic lockdown brought about by the Covid-19 pandemic hampered fuel demand in Nigeria.
However, due to the price hikes and increased market share, Ardova Plc reported a relatively strong year. Total revenue grew by 3.1% in 2020, primarily driven by growth in sales of fuel products, which grew by 3.4% y/y to N164.4bn in FY-2020 from N159.2bn in FY-2019. Lubricant sales fell by 1.6% y/y from N17.2bn in FY-2020 to N16.9bn in FY-2019.
Solar system business performed poorly as it recorded a 74.4% y/y decline in revenue to printed at N10.0m in FY-2020 from N39.0m in FY-2019. At the company’s FY-2020 analyst presentation, it stated that its rising sales numbers were due to its increased market share to become the market leader, citing data from Nigeria’s Major Oil marketing association (MOMAN).
Cost of sales printed higher at N169.7bn in FY-2020 from N165.2bn in FY -2019, representing a 2.6% y/y growth. The growth in cost of sales was mainly driven by an increase in petroleum product costs, which grew 3.0% y/y to N157.0bn in FY-2020 from N152.3bn in FY-2019. In addition, the company booked N25.0m in direct costs due to the unveiling of its haulage business as part of its efforts to bolster operating efficiency. Consequently, gross margins rose 3bps to 6.7% y/y.
We note that the marginal improvement in gross margin was driven by the higher margins in its Lubricant (26.2%) segment compared to Petrol or PMS(4.2%). Profit margins in the PMS segment remained low, as the firm does not hold any wholesaler privileges, which would have allowed for improved margins.
However, ARDOVA’s drive to increase its market share in the lubricant market by signing an agreement with Shell lubricant is laudable as it looks to support its more profitable segment. Overall, operating expenses fell 11.7% y/y in FY-2020 due to a 16.6% y/y decline in administrative expenses to N7.3bn.
Improved Performance On An Adjusted Basis
Despite the marginal uptick in revenue and improved cost efficiency, operating profit fell
16.0% y/y to N4.1bn in FY-2020. However, adjusting for the non-recurring profit of N2.6bn booked on disposal of the company’s stake in Amperion Power Distribution Company Limited (Amperion), Forte Upstream Services Limited (FUS), and AP Oil and Gas Ghana, Operating profit was up 46.6%, in the period under review, better projecting Ardova’s performance in FY-2020.
Moderation in the yield environment in 2020 saw finance cost moderate by 68.9% y/y to N1.5bn in FY-2020. Finance income also declined by 94.1% y/y, mainly due to interest on subsidy booked of N3.9bn in 2019. Overall, net finance cost increased by 356.1%. Consequently, profit before tax and profit after tax declined 37.6% y/y and 52.6% y/y, to N2.9bn and N1.8bn in the period under review. EPS fell to N1.4 per share in FY-2020. The firm proposed a dividend of N0.19N per share, representing a 1.3% dividend yield at the current price, subject to shareholders’ approval at its AGM.
Balance Sheet- Expansions In PPE Drive Balance Sheet Growth
ARDOVA’s total assets in the period under review grew 10.4% to N68.4bn , mainly due to
increases in building under construction, as the company continues to expand on its base (retail stations). Hence, PPE rose 49.0% to N15.2bn in the period.
The company extended its debt/borrowing lines in the period under review, as total debt grew 121.1% y/y to N11.8bn. However, finance costs fell by -68.9% though average cost of borrowing settled at 10.5% mainly because the bulk of the borrowing was accessed via overdraft facilities.
At 10.5%, ARVODA’s cost of borrowing is well above discount rates on commercial papers which tumbled to a record low in 2020, with several large corporates issuing capital at sub -3%. As such, we opine that ARDOVA would benefit from a capital market program to optimize its funding cost, considering that the yield environment remains relatively friendly for private sector capital raise.
Interest coverage was stronger at 3.9x in FY-2020 vs. 1.5x in FY-2019, respectively. Net cash flows from operations printed at N4.8bn in FY-2020, from N4.7bn in FY-2019.
Outlook For Ardova Is Moderate Following Uncertainty In The Downstream Oil And Gas Sector
ARDOVA outlook remains moderate, considering the firm’s cost improvement and efficiency management drive observed in recent quarters; Operating margin and profit before tax margin was up 100bps and 47bps y/y, respectively, due to a 166bps
moderation in operating costs y/y (adjusting for gain on assets in 2019). However, due to the continued uncertainty around the adjustment of Petrol (PMS) prices, we have also
tempered our optimism around full price recovery.
Although the FGN made efforts to partially deregulate and moved away from its regulated pricing regime in 2020, recent dynamics in the market points to another episode of policy backflip.
According to the PPPRA pricing framework, the landing cost of PMS should be in the range of N209-N212 per litre, considering the rising spot FOB Rotterdam prices. The FX challenges and the continuation of the NNPC direct sale, direct purchase program (DSDP) means the NNPC through the PPMC remains the sole importer of PMS. As such, ARDOVA and other downstream players will continue to earn a retailer’s margin for PMS sales.
Recently, the company disclosed its intentions to acquire Enyo. Clearly, the Enyo
the acquisition fits nicely into ARDOVA’s expansion drive and would complement its retail
ARDOVA currently has a network of about 450 or more stations, Enyo will add to this strong base with about 90 or more retail outlets in 15 Nigerian states. While we are unable to factor in the potential impact of the acquisition into our model estimates for now due to the non-availability of the official data, we expect this to further bolster volumes and improve overall performance due to a potential benefit from economies of scale.
In view of the foregoing, our expectations for the performance of ARDOVA in 2021 remain moderate. As such, we retain our model assumption while awaiting details about the proposed acquisition. Nevertheless, adjusting our valuation estimates for a higher risk-free rate, we adjust our Target Price for ARDOVA to N17.63 compared to the current market price of N14.85. This portends an upside of 19.6% thus we retain our BUY rating on the ticker.