May 30, 2019
By FBNQuest Research
Slight cut to EPS ests over the 2019-21E period
11 Plc’s Q1 2019 earnings of N2.0bn missed our estimate by around 19%, primarily on the back of a negative surprise on the gross margin line. As such, we have cut our earnings forecast over the 2019-21E period by around -5%. As anticipated, sales came in subdued, up by just 2% y/y to N46.1bn. White products sales in Q1, which accounted for c.82% of total sales, were flattish y/y at N37.5bn.
This partially offset a double-digit y/y rise in lubes sales and rapid improvement in the liquefied petroleum gas segment. Given prevalent policy constraints on gasoline prices we do not expect sales growth through the year to be materially different from Q1. We forecast sales growth of 3% y/y to N169.5bn for 2019E. We also expect a relatively tougher year for the industry as growing implicit subsidies continue to stifle growth, hence weighing negatively on profitability.
According to industry sources, the landing cost for gasoline over the past 12 months averaged around N200/litre, which compares with the N145/l pump price ceiling. As such, we forecast an EPS decline of -8% y/y in 2019E. Our new price target of N190.0 is down by around -2%. At current levels, our price target implies an upside potential of +8.6%; therefore we retain our Neutral rating on the stock.
Year-to-date, 11 shares have declined by -5.7%, underperforming the NSE ASI by around 5%. The shares are trading on a 2019E P/E multiple of 7.3x for an average EPS growth of around 8% y/y in 2020E.
Q1 2019 PAT of N2.0bn declined -26 % y/y
In Q1 2019, while sales came in flattish y/y at N46.1bn, PBT and PAT both declined by -26% y/y respectively. The decline in profitability was driven by a -321bp y/y gross margin contraction to 7.9% which more than offset a double-digit y/y decline in operating expenses to N2.5bn and a flattish topline. To a lesser extent, rental income which fell by around -4% y/y to N2.0bn did not help.
Sequentially, sales grew by around 16% q/q. However, PBT and PAT delivered much stronger growth of 47% q/q and 40% q/q respectively, as the q/q gross margin contraction was less significant than on a y/y basis. Compared with our forecasts, while sales were in line with our estimate, PBT missed by around 19% primarily due to a negative surprise on the gross margin line.