April 10, 2019/FBNQuest Research
Neutral rating maintained
11 Plc’s FY earnings of N9.3bn missed our estimate by around 10% due to negative surprises on the opex and other income lines. Although 11’s petroleum products marketing business grew y/y with sales up 31%, driven by white product sales which grew up 33% y/y, the business segment was less profitable with PBT margin contracting slightly by –21bps to 3.5%. As a standalone, this business segment remains challenging. 11’s FY 2018 sales were supported once again by rising rental income. As such, we have cut our EPS forecasts over the 2019-2021E period by around -6% on average.
According to management notes, resumed participation in aviation fuel sales at the Lagos Airport in Q4 boosted the firm’s topline. As such, as a read-across, we expect aviation fuel sales to have a more meaningful impact on topline growth in 2019 as the firm intends to expand operations to other cities. We therefore forecast sales growth of 3% y/y to N169.6bn in 2019E. Last week, the finance minister stated that in the near term, the FG intends to raise capital to offset its existing debts to contractors and subsidy arrears. According to official estimates, fx differentials and accrued interest on fuel subsidies is around N514bn. A partial repayment of this sum will provide a tremendous boost to the sector. Its absence, combined with a continued regulation of gasoline prices, we continue to see limited growth for 11 and other industry participants.
We forecast flattish EPS growth for 2019E. Our new price target of N194.0 is down by around-21% because we have lowered our long term growth expectation for Mobil by -200bps to 3%. At current levels, our price target implies an upside potential of +13.5%; therefore we retain our Neutral rating on the stock. Year-to-date, 11 shares have declined by -7.8%, broadly in line with the NSE ASI’s performance. The shares are trading on a 2019E P/E multiple of 6.5x for an average EPS growth of 2% y/y over the 2019-2021E period.
Q4 2018 PAT of N1.5bn declined -50 % y/y
In Q4 2018, while sales improved by 7% y/y to N39.6bn, PBT and PAT both declined by -53% y/y and -50% y/y to N2.1bn and N1.5bn respectively. A double-digit y/y rise in operating expenses to N3.4bn, a -24% y/y decline in other income and a gross margin contraction of -314bps y/y to 9.6% more than offset the topline growth delivered within the period and led to the y/y decline in profitability.
Sequentially, the trend was broadly similar. While sales came in flattish q/q (+1.1%), PBT and PAT both fell by -43% q/q and -40% q/q respectively. 11 Plc proposed a final dividend of N8.25 which implies a dividend yield of around 5%.