TOTAL OIL NIGERIA PLC: Oil giant beats projection with remarkable performance

Total Nigeria Plc is a Marketing and Services subsidiary of Total; a multinational energy company operating in more than 130 countries and committed to providing sustainable products and services for its customers. For over 50 years,Total Nigeria Plc has remained the leader in the downstream sector of the Nigerian oil and gas industry with an extensive distribution network of over 500 service stations nationwide and a wide range of top quality energy products and services. Total Nigeria Plc (RC 1396) was incorporated as a private company on June 1, 1956 to market petroleum products in Nigeria. In December 11, 2001, the company had a successful merger which paved way for sustainable growth and continuous development. Total Oil Nigeria Plc recently released its full year result ended December 31st 2016, showing outstanding growth in performance indicators despite tough operating business climate in Nigeria. The oil giant delights investors by consistently paying dividend twice every year; a half year interim dividend and a final dividend at the end of the financial year. For the year ended December 2016, the Company has declared a total dividend per share (DPS) of N17.00, comprising of an interim dividend of N10.00 already paid in 2016 and a final dividend of N7.00 payable in June 2017.

REVENUE SURGES AS DEREGULATION HOLDS GROUND

Total Oil Plc reported a substantial increase of 39.86% in revenue to N290.95 billion in December 2016 from N208.03 billion in the corresponding period of 2015.This impressive growth surpasses year on year growth of 13.41% recorded in 2015. Growth in revenue was spurred by sales of petroleum products and lubricants which grew by 38.02% and 53.04% respectively during the period.The increase in revenue could also be attributed to the improved activities in global and domestic oil market during the year. Nigerian oil marketers were supported through government regulation in allocating petroleum prices that covers increasing foreign exchange risk and rising importation cost. Increment of importation cost is the direct result of depreciation of the Naira, and earlier by a sudden reduction in the regulated price of product in the domestic market without a clearer policy direction on how government intended to fund the eventual expanded subsidy implications. Hence, the various payment disputes surrounding the Petroleum Support Fund (PSF) allocation highlighted the cautious product importation by players including Total Oil Plc and the eventual scarcity that was witnessed in the last month of the quarter under review. Expectedly, the Company recorded a massive growth of 98.36% in gross profit to N49.10 billion in December 2016 from N24.75 billion in the corresponding year of 2015, despite an increase of 31.96% in costs of sales to N241.85 billion in December 2016 from N183.27 billion in December 2015. The company was able to manage further growth in cost of sales through a rigorous cost saving and efficient operating structure as well as investment in research and development and training of employees on new measures and better production and service delivery techniques.

EFFICIENCY RECORDED IN COST MANAGEMENT

For the year ended December 31st 2016, Total Nigeria Plc’s selling & distribution expenses increased by a negligible 0.99% to N4.72 billion from N4.67 billion recorded in the corresponding year in 2015.The company has struggled over the last few years to curtail increment in operational costs due to high overhead cost ranging from the cost of delivering its product through trucking to all its retails outlets to high personnel costs due to staff recruitment to meet with its expansion plans and to help achieve its goals and objectives. Administrative expenses grew by a 5.42% to N15.85 billion from N15.03 billion recorded in December 2015. Hence, this reduction is an indication of management efficiency and success of its cost saving strategies. In addition, the Company continued to invest heavily in the promotion of its popular “Quartz” oil lubricant aimed at further strengthening the ‘Total’ brand across the federation. This is in addition to expenses incurred on repairs, maintenance and upgrade of some of its retail outlets nationwide. Furthermore, Total Oil records moves from a moderate 2.78% year on year increase recorded in December 2015 to a significant 20.33% increase in other income to N1.45 billion in December 2016 from N1.20 billion over the corresponding year of 2015. Hence, operating profit for the year grew substantially to N20.93 billion in December 2016 from N6.26 billion in December 2015 indicating a percentage increase of 234.63%.

FINANCE COST FAILS TO FORESTALL MASSIVE GROWTH IN NET EARNINGS

Record displays that both financial income and finance cost declined enormously year on year by 86.53% to N273.55m from N2.03 billion and by 52.43% to N851.86m from N1.79 billion respectively. Net finance costs declined to a negative N578.31m from a positive N240.38m during the period under review. Profit before tax thus grew by 213.35% to N20.35 billion in December 2016 from N6.50 billion in the corresponding period of December 2015 while net income witnessed an extraordinary growth of 265.63% to N14.80 billion from N4.05 billion over the same period.The growth in net income was despite considerable rise of 126.93% in income tax to N5.56 billion in December 2016 from N2.45 billion in December 2015. The company’s profitability and efficiency ratios dropped modestly. Return on asset (ROA) decreased to 4.84% from 5.54% in the preceding year while return on equity (ROE) followed suit, decreasing to 24.92% from 33.21% over the same year. Pre-tax margin also followed the downward trend dropping to 1.95% from 2.20%.

SIGNIFICANT DECLINE IN ASSET QUALITY

As at December 2016,Total Oil Plc grew its total asset substantially by 63.68% in to N136.93 billion from N83.65 billion as at December 2015 while its total liabilities also increased by 68.16% to N113.36 billion in December 2016 from N67.41 billion in December 2015. Company’s shareholders fund followed similar massive increase as it rose by 45.11% to N23.57 billion from N16.24 billion year on year.

BUY RECOMMENDATION

We recognise the management’s effort in curbing its expenses which has been a major burden hampering the profitability of the company in prior periods. In addition, as expected the Federal Government dispute with petroleum marketers over the Petroleum Support Fund (PSF) allocation in the short to medium term, which greatly disrupted the supply and sale of petroleum products in the industry and accounted for not too impressive performance of Total Oil Plc in the previous year is been resolved. With recent action and policy by management ofTotal Oil Nigeria Plc towards further reduction of its operating cost, finance cost and borrowings, we expect less operation and financial disparity which erodes profitability as it optimise market opportunities. This will lead to a continua success in its financial metrics in the coming periods. Considering the above, we project revenue of N322.48 billion and net income of N19.41 billion for December 2017. This leads to a forward EPS of N57.16. Using a combination of PE multiple and sustainable growth rate (SGR), we arrive at a target price of N337.22 and since this represents a 29.7% upside potential on the current price, we therefore place a BUY on the stock of Total Nigeria Plc.

WITH RECENT ACTION AND POLICY BY MANAGEMENT OF TOTAL OIL NIGERIA PLC TOWARDS FURTHER REDUCTION OF ITS OPERATING COST, FINANCE COST AND BORROWINGS, WE EXPECT LESS OPERATION AND FINANCIAL DISPARITY WHICH ERODES PROFITABILITY AS IT OPTIMISE MARKET OPPORTUNITIES. THIS WILL LEAD TO A CONTINUA SUCCESS IN ITS FINANCIAL METRICS IN THE COMING PERIODS