• Total Oil Plc’s (Total) financial performance in the six months ended June, 30th 2012 showed continued expansion in its sales volume with a YoY and QoQ revenue growth of 25.5% and 15.29% respectively to N109.8 billion; surpassing our forecast by 8.2%. We suspect the performance was supported by higher import quota in Q2’2012 as the PPPRA increased allocations to the oil majors.
• Cost of sales continued its sustained increase rising 26.9% YoY and 15.48% QoQ to N96.9 billion; 11% above our forecast. We believe this simply reflects the impact of elevated energy prices earlier in the period. Gross profit rose 16.5% YoY to N12.9 billion, but gross margin still dipped 91bps to 11.75%--lower than its 5-year average of 12.3%--reflecting a trend observed across the industry. This is however better than the 3.56ppts and 9.8ppts decline for Oando and Mobil respectively in H1’2012.
• Notwithstanding the pressure on input costs, we believe a 101bps drop in the ratio of operating costs to revenue to 78.8% in H1’2012 reflects Total’s improved efficiency, largely on the back of improved logistics. This was further reflected in the 29.7% QoQ rise in operating income.
Furthermore PBT in Q2’2012 rose 35.1% YoY to N4.5 billion, 12.2% above our forecast for the period. As a result of improvements to PBT and a stable tax rate, PAT rose 37.5% YoY to N2.9 billion which was 18.9% above our forecast for the period.
Expectations for stronger H2 sparks forecast revisions
• We expect increased allocation among major marketers and consequent recovery in sales volumes to offset constraints to Total’s revenue growth – while anticipating further margin support on the back of stable to lower crude prices through the rest of 2012. We left our operating expense unchanged at 7.6%, already factoring the improved efficiency gains on our medium-long term outlook for the company. Interest expense declined 12.5% YoY, but increased 906% QoQ to N332 million, as short term borrowing jumped 443%, suggesting an increase in borrowing at the end of the reporting period to finance inventory uptake, as speculation on subsidy payments prevailed. However, as Q2 2012 interest expense was only .64% of COGS had limited impact on our model assumptions.
We retain our effective tax rate estimates at 34.9% which corresponds with the 34% 5-year average. Revisions to our model imply a higher 3-year CAGR forecast for the company from 10.1% to 10.65%. The net revisions in our estimates put our new full year PAT estimate at N 4.8 billion.
• Despite the challenging environment faced by petroleum marketers since the start of the year on the hiccups associated with the attempted deregulation of the downstream sector- we believe that much of Total’s stronger earnings in Q2 reflect better operational efficiency, as the company continues to make the best of its coordination with its global parent’s logistics platform even as it presses ahead with its N5.2 billion network upgrade of its existing outlets.
• In addition to being able to leverage off its parent company’s logistics platform in reducing costs, Total Nigeria also has one of the largest and most efficient retail networks in the country which confers advantages over most of its peers in increasing through-put, an advantage we believe it will wield to good effect on anticipated allocation increases to major marketers.
• Total has underperformed the ARM Oil and Gas Index YTD, declining 29.82% YTD, compared to a 21.71% decline by the ARM Oil and Gas Index. Nevertheless, at current and forward PE’s of 9.9x and 6.7x respectively, Total trades marginally below its peer average of 7.5x on a forward PE basis. As a result of the above changes, we revise our target price 1.9% to N157.29 from N154.23, leaving yesterday’s closing price at an 18.26% discount to our revised target price. As such we retain our OVERWEIGHT rating on the stock ARM ratings and recommendations
ARM now employs a two-tier rating system which is based on systemic importance of the security under review and the deviation of our target price for the stock from current market price. We characterize systemic importance as a function of a stock’s ranking among the group of top 20 stocks by NSE market capitalization over a trailing 6 month period (minimum) to the review date. We adopt a 5 point rating system for this category of stocks and a 3 point rating system for stocks outside this group. The choice of top 20 stocks arises from the consideration that this group of stocks constitutes >75% of overall market capitalization and stocks outside this group are generally less liquid and individually account for <<1% of market capitalization. For stocks in both categories, the basis for ratings subject to target price deviation is outlined below:
DISCLAIMER/ADVICE TO READERS:While the website is checked for accuracy, we are not liable for any incorrect information included. The details of this publication should not be construed as an investment advice by the author/analyst or the publishers/Proshare. Proshare Limited, its employees and analysts accept no liability for any loss arising from the use of this information. All opinions on this page/site constitute the authors best estimate judgement as of this date and are subject to change without notice. Investors should see the content of this page as one of the factors to consider in making their investment decision. We recommend that you make enquiries based on your own circumstances and, if necessary, take professional advice before entering into transactions. This article is published with the consent of the author(s) for circulation to the online investment community in accordance with the terms of usage. Further enquiries should be directed to the author whose e-mail is ARM Research [email@example.com]