- Fuel segment earnings constrained by the tough operating environment
- Gross profit across all but Power segment down y/y
- Net finance costs moderate 15% y/y despite sticky debt balance
- PAT further supported by tax credit, beats estimate by 94%
- Valuation revised lower amidst more cautious outlook on fuel segment
Strong earnings growth buoyed by Power generation segment
FO released its FY’17 results last week, reporting stronger y/y earnings growth for the Group despite mixed performances across its four business lines. Constrained by the tough operating environment in the petroleum downstream sector, the company’s flagship Fuel Retailing segment (largest segment – accounts for 61% of revenue) reported a 36% y/y decline in Revenue to ₦78.8 billion, 6% worse than we expected. Revenue for the Production Chemicals segment (smallest segment – accounts for c.1% of revenue) was also down 27% y/y to ₦1.9 billion. Bucking the trend, the Lubricant & Grease segment (9% of revenue, 3rd largest) rose 6% y/y to ₦12.1 billion. The Power Generation segment (2nd largest segment – accounting for 27% Revenue) continues to post strong earnings with Revenue almost tripling y/y to ₦36.6 billion, 2% better than our estimate. Cumulatively, the Group’s Revenue was down 13% y/y to ₦129.4 billion vs. Vetiva’s estimate of ₦134.2 billion. However, on the back of impressive contribution from the Power segment, Gross Profit rose 17% y/y to ₦24.1 billion (Vetiva: ₦22.6 billion) despite all other segments reporting y/y declines – Fuel Retailing (-29%), Production Chemicals (-17%), Lubricant & Grease (-46%). With OPEX coming in line with estimates and supported by Other Income of ₦2.1 billion, FY’17 EBIT rose 48% y/y to ₦14.2 billion and 13% better than our estimate. Furthermore, PBT (up 99% y/y to ₦10.6 billion) came in even much higher than we had anticipated (51% ahead of the estimate) following stickier than expected Finance cost of ₦5.7 billion (Vetiva: ₦7.2 billion). We highlight that the expense line was just ₦96 million in Q4’17, despite relatively flat debt balance (₦34.8 billion) and below 9M’17 quarterly run rate (₦1.9 billion). The largest deviation, however, came from the reported tax over the period –Tax Credit of ₦1.6 billion vs Vetiva tax charge estimate of ₦0.7 billion (9M’17: Tax charge of ₦0.5 billion). Consequently, FY’17 PAT rose over three-folds to ₦12.2 billion, well ahead of our ₦6.3 billion estimates.
Slight revision to valuation and earnings outlook
Despite the bottom-line outperformance, we maintain most of our erstwhile expectations on FO’s operations for FY’18. Specifically, we remain cautious on the Fuel retailing segment as we do not foresee deregulation in the near term. Consequently, we cut the segment’s FY’18 revenue growth to 5% y/y (Previous: 10%). Also, we anticipate improved performance from the Production Chemicals and Lubricant & Grease segments amidst continuing improvement in economic activities. More importantly, we expect the power segment to continue to drive earnings in FY’18 even as we hold a cautiously optimistic view on gas supply. Overall, we revise the Group’s FY’18 Revenue to ₦138.6 billion (Previous: ₦148.4 billion) following our lower revision to the Fuel retailing earnings. Similarly, we cut our FY’18 EBIT to ₦14.1 billion (Previous: ₦14.8 billion). Notwithstanding the tax credit recognized in FY’17, we estimate an effective tax rate of 28% for FY’18 – translating to FY’18 PAT of ₦6.6 billion (Previous: ₦7.0 billion). We revise our target price to ₦83.57 (Previous: ₦87.04) on the back of more cautious outlook on the fuel segment.