August 20, 2018/FBNQuest Research
Increase of 25% to our 2018-19E EPS estimates
Total Nigeria’s (Total) Q2 2018 earnings of N4.0bn grew by 107% y/y and ahead of our expectations. Therefore, we have raised our EPS estimates over the 2018-19E period by around 25% on average, and our price target by 15% to N359.0 as we roll forward our valuation to 2019E.
We forecast sales and earnings growth of 6% y/y and 43% y/y to N306.1bn and N11.4bn respectively, driven by a 14% gross margin expansion and an opex growth of around 17% y/y. We continue to expect a relatively lower other income result in 2018 due to the absence of income from the reversal and re-measurement of fx forward contracts which boosted 2017 numbers. From an operational perspective, we do not anticipate any material alterations to Total’s business strategy, with its primary focus set on product distribution.
With global crude oil prices currently around US$70/barrel, restrictive implicit subsidies continue to expand. We do not expect the federal government to fully deregulate gasoline prices this year, especially as general elections are set to take place in Q1 2019. From current levels, our price target of N359.0 implies an upside potential of 96%.
Notwithstanding, we continue to retain our Neutral rating on the stock, because we do not see any near term catalysts in the absence of an upward adjustment to gasoline pump prices currently at N145/litre. Year-to-date, Total shares have shed -20.4%, underperforming the broad market by around 12%. They are currently trading on a 2018 P/E of 5.4x for an EPS decline of around -30% in 2019E.
Q2 earnings up by 107% y/y; well ahead of our forecast
In Q2 2018, Total’s sales grew by 11% y/y to N80.6bn while PBT was up by 96% y/y to N6.0bn. Sales were buoyed by a 59% y/y and 129% y/y rise in General Trade and Aviation sales to N20.6bn and N8.9bn respectively. Additionally, sales of N234m and N221m from the Congolese and Cameroon markets helped.
The growth on the PBT line was driven by a +591bp y/y gross margin expansion to 16%, which more than offset a 17% y/y rise in operating expenses to N6.2bn. Q2 gross margin was boosted by sales via service stations and corporate customers within the aviation sector. PAT was up by 107% y/y to N4.0bn, driven by a lower effective tax rate of 33.4% compared with 36.8% in Q2 2017.
Sequentially, while sales grew by 7% q/q, PBT and PAT were up 129% q/q and 140% q/q respectively. Compared with our estimates, while sales were ahead of our N74.7bn forecast by 8%, the surprise in PAT was more significant. Besides the better-than-expected sales, the variance was driven by a positive surprise on the gross margin line.