EQUITY NOTE MOBIL OIL NIGERIA PLC:

Severe macro-economic challenges greatly erode earnings

Mobil Oil Nigeria Plc (Mobil Oil) is a subsidiary of Exxon Mobil; an international integrated oil and gas company, based in HoustonTexas, United States.The Company changed to its current name when it became a publicly quoted company in 1978.The Company operates in the integrated oil and gas industry. Mobil Oil Nigeria is engaged in the production and marketing of petrochemicals (gasoline, motor oils, lubricants, marine and jet fuels, etc.), packaging films and other chemical products. Its ultra-modern lube oil plant in Apapa, Lagos is regarded as one of the most modern in Africa. Due to a number of macro-economic challenges, which include currency volatility and the delayed subsidy payment faced by the petroleum marketers during the quarter as well as the attendant scarcity of products and hence stoppage of sales, Mobil Oil Nigeria Plc recorded a decline in financial performance across board and hence substantial decline in key performance indicators in its recently released first quarter result for the period ended March 31st, 2015.

CAUTIOUS TRADING ON GLOBAL AND DOMESTIC CHALLENGES DEPRESSED TURNOVER

Mobil Oil Plc posted a significant 25.8% decline in turnover to N16.50 billion in March 2015 from N22.41 billion in the corresponding period of 2014.This was due largely to the challenging global and domestic oil market quagmires during the period. Most Nigerian oil marketers struggled to grow revenue due to the sharp drop in petroleum product supply following the rise in importation cost as a result of the depreciation of the Naira and the 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 Mobil Oil Plc and the eventual scarcity that was witnessed in the last month of the quarter under review. However, the Company managed to minimize the decline in gross profit to a negligible 1.4% to N2.99 billion from N3.03 billion in the corresponding period of 2014, through effective costs of sales management. Costs of sales reduced significantly by 29.7% to N13.51 billion in March 2015 from N19.38 billion in March 2014. The company was able to prevent a 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. Increased over head impedes stronger growth in operating profit In relation to the company’s operation, distribution & administrative expenses increased by 14.9% to N2.03 billion in March 2015 from N1.76 billion recorded in the corresponding period in 2014. Over the last few years, the company has struggled to curtail increase 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. In addition, the Company continued to invest heavily in the promotion of its popular “Mobil 1” oil lubricant aimed at further strengthening the ‘Mobil’ brand across the federation during the quarter. This is in addition to expenses incurred on repairs, maintenance and upgrade of some of its retail outlets nationwide. All of these factors greatly impacted on operating profitability. Other expenses however declined quite significantly by 99.8% to N125m in March 2015 from N63.73m in March 2014 while other income grew considerably by 72.6% to N1.09 billion from N632m over the period. However, despite the rise in administrative expenses, operating income witnessed a growth of 11.6% to N2.06 billion in 2015 from N1.85 billion in the corresponding period of

2014.

ZERO GAIN ON NON-CURRENT ASSET HELD FOR SALE RESULTED IN A DEPRESSED NET INCOME

The effect of a zero gain on non-current asset held for sale from N2.85 billion in the corresponding period of 2015 could not be mitigated by the positive net finance income of N7.197m during the quarter under review. Net finance income declined by -85% from N50.30m in the corresponding period of 2014. As a result, profit before tax declined by 56.5% to N2.07 billion in March 2015 from N4.75 billion in March 2014. Net income also declined by 61.5% to N1.49 billion from N3.86 billion over the period. The company’s profitability and efficiency ratios though still positive, reduced drastically. Earnings per share declined to N4.13 from N10.72 reflecting the 61.5% decline in net income. In addition return on asset (ROA) declined to 2.8% from 7.8% in the preceding period while return on equity (ROE) also followed suit, declining to 9.9% from 28.5% over the same period. Gross profit margin however improved to 18.1% from 13.5%, while pre-tax profit margin declined to 12.53% and 21.18% respectively.

SHAREHOLDERS WEALTH STILL INTACT DESPITE THE UNIMPRESSIVE EARNINGS PERFORMANCE

Mobil Oil Plc recorded a higher growth in liabilities over assets. Total asset rose by 7.8% to N53.00billion from N49.23 billion in 2014 while its total liabilities rose by 32.7% to N37.96 billion from N28.60 billion, year-onyear. The major contributors to the positive dynamics in assets are: investment property which rose by 4.6%, inventories which rose by 28.9%, cash and equivalents 570.6%, and prepayment growth of 7.7%.The total liabilities was largely affected by trades and other payables which grew by 7.0%, noncurrent portion of deferred revenue growing by 17.5%, along with retirement benefit of 7.0%.The company’s shareholders fund grew by 10.1% to N15.04 billion from N13.55 billion over the period. It is noteworthy that the Company carries no debt obligation in its book as at the end of the March 2015 beyond trade related liabilities.

WE DOWNGRADE MOBIL PLC SHARES TO A HOLD PENDING ITS HALF YEAR RESULTS

We recognise the management’s effort in curbing its expenses which has been a major burden hampering the profitability of the company. In addition, we expect the Federal Government to resolve the recent dispute and disagreement between them and 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 the dismal performance of Mobil Oil Plc in the first quarter of the year. In addition, we expect the low leverage in the book of the Company to allow it significant room for debt driven growth through balance sheet optimisation where the industry is fully deregulated and market opportunities expanded. This is not unlikely to happen before the end of the second half of the year. Considering the above, we estimate a revenue figure of N78.98 billion and net income of N4.36 billion for December 2015.This translates to a forward EPS of N12.10. Using a combination of an industry PE multiple of 12.21x and Book Value multiple of 4.57, we arrive a target price of N147.78 and N169.74; an average which gives us a fair price of N158.76. This represents an upside of 7.27% on the current price. We therefore place a HOLD on Mobil Oil Plc shares.

IN ADDITION, WE EXPECT THE LOW LEVERAGE IN THE BOOK OF THE COMPANY TO ALLOW IT SIGNIFICANT ROOM FOR DEBT DRIVEN GROWTH THROUGH BALANCE SHEET OPTIMISATION WHERE THE INDUSTRY IS FULLY DEREGULATED AND MARKET OPPORTUNITIES EXPANDED. THIS IS NOT UNLIKELY TO HAPPEN BEFORE THE END OF THE SECOND HALF OF THE YEAR