Ardova: Rescued by Divestment, Subsidy Gains

Goddy Egene writes that the jump of over 500 per cent in net profit recorded by Ardova Plc (formerly Forte Oil Plc) for the year ended December 31, 2019, was majorly due to proceeds made from divestment from subsidiaries and subsidy gains

Ardova Plc, formerly known as Forte Oil Plc, recently reported its financial performance for the year ended December 31, 2019. While top-line grew by 31 per cent, the bottom-line soared by over 500 per cent. Looking at the results, Ignite Investments and Commodities Limited led by Prudent Energy Services Limited, which bought 74 per cent equity stake divested by Femi Otedola last June, must be commending themselves that it was a wise investment decision.

An analysis of the results showed that Ardova Plc, recorded revenue of N176.6 billion, showing an increase of 31 per cent above the N134.7 billion in 2018. Gross profit fell marginally from N11.33 billion to N11.28 billion, while other income jumped by 132 per cent from N1.9 billion to N4.3 billion, a development that boosted its bottom-line. Specifically, profit before tax (PBT) improved from N1.0 billion to N4.7 billion while profit after tax (PAT) soared from N0.631 billion to N3.915 billion.

According to analysts at Meristem Securities Limited, divestment and subsidy gains boosted the earnings of Ardova Plc. The analysts said the impressive top-line growth rode on the back of a fourth quarter (Q4) standalone turnover of N53 billion, the highest in 2019.

Expectedly, fuels sales were the key driver of top-line, contributing N159.25 billion, which was 90.2 per cent of gross revenue, which implies segment growth of 31.78 per cent and speaks to Ardova’s effective product rationalisation amidst the headwinds in the Nigerian downstream sector.

The Lubricants and greases segment also saw improved performance, as sales logged a 25.71 per cent expansion to hit in at N17.25 billion compared with N13.72 billion in 2018. However, contribution from lubricants was relatively flat, as it formed only 9.77 per cent of revenue compared to 10.19 per cent in 2018. Liquefied Petroleum Gas (LPG) and Cylinder Sales printed a smaller N0.02 billion.

The analysts noted that with Prudent Energy’s acquisition of a controlling stake in Ardova, the stronger LPG sales speaks to the company’s strategy to utilize a sizable number of Ardova’s retail stations to sell LPG.

“For further context, Prudent Energy completed the construction of a 6,000MT LPG plant in Delta State in 2019, which we expect to buffer growth of the LPG sub-segment going forward. In 2020, we envisage that Ardova will seek to expand its presence in LPG, Aviation Fuel and leverage its alliance with Prudent in logistics and storage. We therefore expect that revenue will come in at N197.64 billion in 2020,” they said.

The analysts explained that earnings before interest and tax (EBIT) boosted following disposal of subsidiaries as cost to sales settled at 93.61 per cent in 2019, compared with 91.59 per cent in 2018.

The lube segment yet again, proved the most cost-effective segment of Ardova’s business, with its cost to sales coming in at 74.34 per cent for 2019. Cost to sales for the fuels segment was 95.36 per cent, while the Solar and LPG segments recorded 105.13 per cent and 105.6 per cent respectively.

“Overall cost-of-sales therefore settled at N165.3 billion, a disconcerting 33.96 per cent growth, given that it was higher than the revenue growth rate. Operating profit rose by 83.81 per cent to settle at N4.93 billion, albeit spiked by Ardova’s gain on disposal of subsidiaries which came to N2.67 billion.

Finance costs rose by 35.72 per cent to N4.83 billion, as the company discounted its promissory notes. Alternatively, interest expense would have ticked up by only 4.28 per cent. There was a significant 306.61 per cent gain in finance income, N4.56 billion, as the federal government addressed non-payment of foreign exchange (FX) differentials on subsidy to the company, which contributed 86.66 per cent (N3.95 billion) to total finance income. Net finance costs for 2019 thereby dropped to N0.27 billion (N1.9 billion in 2018), supporting pre-tax earnings growth of 513.56 per cent (N4.65 billion),” they said.

However, Ardova’s total assets shrank from N61.2 billion in 2018 to N49.6 billion in 2019, following its divestment from its subsidiaries.

According to analysts at Meristem, with gains from its divestment, they are envisaging Ardova will seek to expand its retail footprint and have a stronger focus on Lubricants to boost its top and bottom line.

When the company divested from its divestment from and sale of its upstream services business (Forte Upstream Services Limited, AP Oil and Gas Ghana Limited and its power generating business – Amperion Power Distribution Company Limited), which were sold for a total consideration of N12.97 billion, analysts at Lead Capital had wondered why the firm took that decision.

“Ardova’s decision to sell said businesses initially aroused our curiosity, as it would exit the more profitable power generation business for full concentration on the low margin homogeneous petroleum and lubricants marketing business. For context, in 2018, power generation contributed 20 per cent and 51.4 per cent, revenue and gross profit respectively. While the downstream made up 70 per cent and 48.45 per cent of revenue and gross profits respectively,” they said.

But the analysts noted that with a N1.725 billion special dividends, which was paid from proceeds of the divestment, the company was still left with a decent sum.

“We are left with questions about management’s decision for optimal utilization of the sale proceeds, which could either go to market footprint expansion or balance sheet optimisation. As it stands, Ardova is now a wholly downstream play, which makes us struggle to see a case for increased market presence, owing to the highly fragmented, thin margin (9.05 per cent profit margin full year 2018), homogeneous and full capacity petroleum marketing sector,” they said.

According to them, on the other hand, they consider Ardova’s relatively high financial leverage which called for aggressive action towards driving efficiency.

“With a debt to equity ratio of 1.16x, we believe the proceeds would be put to best use in achieving a healthier balance sheet, specifically for repayment or refinancing of its expensive N9 billion, 19.8 per cent effective interest, 5-year unsecured bond, maturing in 2021. Undertaking this by our estimation should shave close to half of its interest expense, shore up profit margins, and solidify its resistance to business and structural risks. In conclusion, Ardova now dons a new garment, which doesn’t particularly arouse our excitement. Asides diversification purpose, we recommend moving to stocks with high earnings growth, and decent return potential to investors,” the analysts said.

Despite the reservations expressed by the analysts, the new management of the company led by the Chief Executive Officer, Mr. Olumide Adeosun, who took over last June, had assured shareholders and other stakeholders of better value.

According to Adeosun the company would focus on increasing volumes, diversifying business operations, widening distribution networks and extracting potential synergies to boost revenue.

He added that the company would also invest massively in the downstream sector to achieve desired growth.

According to him, in spite of the regulated price of petrol product in the country, Ardova would still break even in other petroleum products in the downstream sub-sector.

And in order to implement its growth strategies, the company got the approval of its shareholders to allow it enter into discussions with Prudent Energy & Services Limited and or any company or individual(s) representing it in connection with the acquisition of identified downstream assets including but not limited to plant and machinery, trucks, stations and subject to independent valuations on fair value, enter into subsequent binding agreements on comparable arm’s length/ commercial terms in relation to the assets to be acquired.

The shareholders also authorised the directors and/or management of the company be authorised to approve, sign and/or execute all documents, appoint such professional parties and advisers, as may be necessary to give effect to the above resolutions, including without limitation, complying with the directives of any regulatory authority and all acts carried out, steps taken and documents executed (or to be executed) by the directors and/or management of the Company in connection with the above resolutions.

Also, the shareholders of the company approved a change in the name from Forte Oil Plc to Ardova Plc last December.