Following a significant pushback in trading activities (crude lifting), ETERNA’s topline contracted by 74.39% YoY, to hit a 5-year low of NGN 58.72bn for 2020FY (vs. NGN 229.27bn in 2019FY).
Revenue from the trading segment (now contributing 2% to total revenue from 72% in 2019FY) declined by 99.37% YoY, on account of the company’s decision to amend its crude lifting contract with clients.
During the year, ETERNA acted as an agent to transactions, receiving commission as revenue. From our assessment, we suspect the drop in crude oil demand alongside FX risk, would have initiated this new policy.
Nevertheless, ETERNA still recorded a significant FX loss of NGN354.06mn in 2020FY, compared to a gain of NGN33.25mn realized in the previous year. Similarly, Fuel and Lubricant sales dipped by 15.46% YoY and 16.75% YoY respectively, in contrast to the growth (Fuel: 5.43% YoY and Lubricant: 54.77% YoY) reported in 2019FY.
Both segments suffered a decline in sales volume, stemming from movement restrictions ensuing from the pandemic, as well as the company’s low retail presence (less than 30 stations nationwide). With the fuel segment now accounting for 77% of total revenue, management would need to expand its retail presence to spur topline growth going forward.
Given this backdrop, we expect the fuel segment to drive revenue growth in the coming year (supported by price and volume increase) – as we envisage that the new trading policy would continue. Hence, the topline is projected to grow by 19.80%YoY to NGN70.34bn for 2021FY.
Revised Strategy Improves Margins
Cost-to-sales fell significantly by 722bps to 90.62% for 2020FY (vs. a 5-year average of 96.19%). The improved markup came largely from the revised trading policies made with clients during the year, which pulled material costs down by 76.58% YoY.
Delivery costs however remained unchanged, bringing the cost of sales to NGN53.21bn (-76.28% YoY) for 2020FY. In contrast, operating expenses grew by 18.20% YoY, owing to increased depreciation expense (+17.03% YoY), as well as an uptick in employee benefits (+621.30% YoY). Notwithstanding, the EBIT margin still edged higher by 2.61%.
Finance income plunged by 87.72% YoY, due to the low-interest environment. However, this reflected positively on finance costs, which dropped by 39.77% YoY, thereby supporting profit before tax growth (+391.88% YoY) to NGN548. We highlight that ETERNA utilized tax credits totalling NGN167.75mn and deferred tax of up to NGN398.09mn, thereby resulting in a net tax credit of NGN392.90mn for the period.
This further amplified bottom-line growth by 752.19% YoY, to NGN941.04mn – lifting net margin to 1.60%, from -0.06% in 2019FY (5-year average at 0.85%). ROE also strengthened by 845bps to 7.31%.
Lenient Credit Terms Dampen Operating Cashflow
The cash conversion cycle went up 2x to 66 days during the financial year, arising from longer receivable days (69 days vs. 32 days over 2019FY). This subsequently impacted cash flow from the operation, which dipped by 86.76% YoY to NGN1.26bn for 2020FY.
Our assessment suggests lenient credit terms were extended to customers, considering the headwinds encountered in the industry. However, we expect a gradual return to normalcy in 2021FY, which should bring receivables lower and improve cashflows.
Recommendation and Outlook
For 2021FY we project an EPS of NGN0.79 and a P/E ratio of 7.56x. This brings our target price to NGN5.97 – an implied downside potential of 0.46% when compared to its current price. We, therefore, recommend a HOLD on the ticker.