Recently, major downstream player, TOTAL released its audited financial result for FY-2020. It was evident that the peculiarities of the economic lockdown, which included the cancellation of local and international flights and the restriction of economic activities (and consequently vehicular movement), disrupted the business of petroleum products marketers.
As a result, TOTAL’s Revenue dipped across all business segments. Revenue fell by 29.1% y/y to N204.1bn in FY-2020, Cost of sales fell faster by 32.3% y/y to print at N173.9bn in FY-2020. Furthermore, due to the decline in sales, Gross Profit and Operating Profit declined by 12.3% y/y and 64.0% y/y to print at N30.7bn and N3.5bn, respectively.
Overall, the company recorded a Profit before and after Tax of N2.9bn and N2.0bn respectively (vs Profit before and after Tax of N3.0bn and N2.2bn respectively in FY-2019). Earnings per Share (EPS) fell by 9.4% y/y to N6.08 per share in FY-2020. The firm proposed a dividend of N6.08 per share.
Below, we highlight key details of the downstream operator’s performance and our expectations for 2021.
Weak Fuel Demand And Loss Of Market Share Hamper Total Sales:
TOTAL’s FY-2020 performance underwhelmed, as Revenue dropped by 29.1% y/y to N204.1bn in FY-2020. Undoubtedly, weaker economic activities triggered by the COVID-19 pandemic, which sparked a series of strict restrictive measures on the movement of people in Q2-2020, hampered sales. Total sales from petroleum products declined by 34.8% y/y to N157.0bn (which made up 76.7%) whilst sales from Lubricants and others fell by 6.8% y/y to N47.7bn in FY- 2020. Lubricant sales consisted of 23.2% of Revenue in FY-2020.
Total Records Weaker Demand Across All Its Major Segments
On a business segment basis, TOTAL experienced a drop in sales across all its reporting segments.
Network sales (70% of total sales), which measures sales at service stations, declined by 29.2% y/y to N143.3bn. General trade (24% of total sales), which tracks sales to corporate customers, declined by 19.9%, as lockdown activity meant offices were fully or partially closed in 2020.
Revenue from its Aviation segment (6% of total sales) dropped by 53.2% y/y to N12.2bn, as domestic and international travel restrictions led to a reduction in sales of Jet-fuel and other aviation products.
Cost Of Sales Falls Faster Than Recovery
Cost of sales remained relatively large compared to Revenue due to the sheer nature of downstream oil and gas service. Cost of sales declined faster than Revenue in FY-2020, as COS declined by 32.3% y/y to N173.9bn in FY- 2020. As such, the firms’ cost margins printed at 85.0% in FY-2020 vs 88.0% in FY-2019.
As a result of the steep drop in total sales, the reduction in cost of sales was not significant enough to compensate for weaker demand. Consequently, Gross profit declined by 12.3% to N30.2bn in FY-2020. However, the Gross margin improved mildly to 14.8% in FY-2020, from 12.0% In FY-2019.
Similarly, TOTAL’s Operating Profit printed lower by 64.0% y/y, owing to weaker demand from sales and a 68.3% y/y drop in other income to N1.0bn, which arose from a 99.0% drop in Gains on the disposal of assets from FY-2019.
Lower-interest environment and Improved PEF Inflows cushions Net finance cost: TOTAL took advantage of the low-yield environment in 2020, as the downstream player recorded a decline of 973.4% in Net finance cost to of N629.1mn, a considerable improvement from N6.7bn in 2019. This was due to the average interest rate on the firm’s overdraft and bank charges falling to 8.4% in FY-2020, from 14.8% in FY-2019.
The improvement in Net finance cost was also boosted by a 175.2% y/y increase in finance income, mainly owing to a 96.7% y/y increase in inflows from the Petroleum equalisation fund (PEF). Noteworthy to mention, adjusting for the PEF inflow, PAT would have printed at a meagre N30.0m in FY-2020.
Overall, the company recorded a Profit before and after Tax of N2.9bn and N2.2bn, respectively, as PBT and PAT fell by 5.2% y/y and 9.4% y/y. The company proposed a N6.08 per share dividend payment for FY-2020, a 9.3% y/y decline from FY-2019.
Working Capital Management -Improvement In Net Cash Flows
In terms of working capital management, the company’s cash balances, excluding balances with Total’s treasury, improved by 10.5% y/y to N4.2bn. This was largely due to a drop in inventory purchases and an increase in accounts payable, up 35% to N73.7bn, mostly to the Total SA group’s sister companies, resulting in an increase in Total liabilities to N115.0bn from N105.0bn in FY-2019.
The company’s total amount owned to related subsidiaries increased 418% to N31.4bn in FY-2020 (previously N6.1bn).
Elsewhere, we note that the company generated Net cash from operating activities worth N43.5bn in FY-2020 from N15.1bn in FY-2019. This was due to a significant drop in inventories, given the fact that the lower fuel demand during the period did not spur the company to purchase more inventory. Also, the N2.0bn recorded from the Petroleum Subsidy Fund aided cash-inflows. Finally, the company’s leverage position (using debt/ equity) improved in FY-2020 to 122.2% from 140.8% in FY-2019.
Outlook For TOTAL – Rebound In Economic Activities To Boost Demand In 2021
Our outlook for the downstream oil and gas sector remains moderate. Our position is predicated on an expected rebound in demand for petroleum products and lubricants follow- ing the lockdown in Q2-2020. However, in our view, this remains the only significant bright spot for companies in the downstream oil and gas sector. On the downside, the prospect of full price discovery for Petrol Motor Spirit (PMS) remains hindered by policy backflips by the FGN and NNPC.
Also, on the downside, the persistent FX challenges, which makes NNPC the largest importer in the market, would mean that TOTAL, for the most part, will only earn a distributors’ margin and be unable to capitalize on wholesaler’s margins as the NNPC remains the primary wholesaler in the country.
For lubricants, we are partly optimistic concerning the growth of TOTAL’s lubricant business. Looking forward, considering the FX challenges its competitors will face in 2021, we expect TOTAL to leverage on its group structure for FX sourcing, as its lubricant sales segment re- mains more profitable than the PMS segment. We expect TOTAL to retain its market share in this segment.
We modelled for TOTAL, incorporating the current market dynamics/fundamentals, which show that most downstream firms earn only a retailer’s margin, as shown by the most re- cent policy backflip by the NNPC and the FGN in Q1-2021. We review our year-end target price for TOTAL upwards of N167.4 per share with an upside of 23.9%, from its current price of N135.9 per share. We raise our to BUY recommendation on the stock.
