Ardova Plc: Lubricant margins may cushion H2 earnings

Ardova enyo Boosted Revenue by 3.7% in Q3-2020 as Operating Expenses Increase Brandspurng1
Chief Executive Officer of Ardova Plc, Olumide Adeosun | Brand Spur Nigeria
  • Fuel revenue rises 19% y/y
  • Gross margin increases 3ppt y/y
  • 469% y/y increase in net profit

Ardova recently released its H1’21 results with revenue declining marginally by 1% y/y from ₦87.3 billion to ₦86.8 billion, a 2% variance from our estimate. However, a 2ppt y/y improvement in gross margin, as well as better cost-efficiency drove after-tax profit 76% higher y/y to ₦1.8 billion  (Vetiva estimate: ₦1.7 billion).

On a quarterly basis, it was able to grow revenue by 27% y/y from ₦35.3 billion in Q2’20 to ₦44.8 billion in Q2’21, on the back of improved demand, as economic activity continued its gradual recovery. Evaluating revenue, sales from the lubricants business recorded the highest improvement, increasing 82% y/y as rising prices in the lubricants space supported this jump.

Ardova enyo Boosted Revenue by 3.7% in Q3-2020 as Operating Expenses Increase Brandspurng1
Chief Executive Officer of Ardova Plc, Olumide Adeosun | Brand Spur Nigeria

Turnover from fuel operations also improved, growing by 19% y/y. However, the company only recorded a 3%  improvement q/q, as it gradually overcomes the supply challenges from the previous quarter.

Additionally, gross margin for the quarter printed at 9% (Q2’20: 6%), bringing gross profit to ₦4.0 billion, an 87% increase y/y. We note that the marginal improvement in gross margin was driven by growth in the lubricants segment, which typically bears higher margins (20%) compared to fuel operations (7%).

Also, despite inflationary pressures, Ardova’s operational efficiency remained sticky, as the operating expense margin increased slightly to 6% from 5% in Q2’20. As a result, Operating profit for the quarter came in at ₦1.2 billion vs the ₦183 million made in Q2’20. With net finance charges of ₦245 million and a ₦493 million tax expense, net income for the quarter came in at ₦922 million (up 469% y/y).

Ardova’s total assets for the period grew 57% y/y from ₦45 billion in Q2’20  to ₦71.6 billion, mainly driven by growth in fixed assets, as the company continues to expand operations. Meanwhile, the company recorded a net operating cash outflow of ₦805 million (H1’20: ₦949 million).

Thus, in a bid to finance working capital, Ardova extended its debt lines, as total debt grew by 74% q/q, with the bulk of the borrowings being accessed via overdrafts.

Looking ahead, as the uncertainty behind PMS pricing becomes clearer, we expect to see a gradual recovery in sales volumes from fuel operations,  although not reverting to Q1’20 levels. Hence, given run rates from the previous quarter, we revise our outlook on revenue from the fuel business downwards by 5% to ₦156 billion.

For the lubricants business, we anticipate a further increase in sales to ₦24.7 billion (up 45%), as improving business activities, coupled with increased pricing in the space, boost sales volumes through the year.

Furthermore, we predict the increased pricing in the lubricants space to remain sticky throughout the year, thus we foresee gross margin printing at 8% for the year. Meanwhile, we see operating costs trending upwards by 5% y/y; hence, we expect the operating expense margin to remain at 5% y/y.

Also, given Ardova’s cash position, we expect to see further borrowings in the coming quarters, thus driving finance costs higher to print at ₦1.7 billion (up 21% y/y). Consequently, this brings our net profit forecast to ₦3.1 billion for the year (2020: ₦2.1 billion).