May 30, 2019
By FBNQuest Research
-34% reduction to our 2019-21E EPS estimates
Total Nigeria (Total) posted a loss after tax of –N474m, the first quarterly loss reported by the firm in over a decade. Similar to Q4 results which were disappointing, the driver behind Q1 losses was elevated interest expenses due to uncharacteristically high debt levels.
Total avoided losses in Q4 only because of a substantial positive result on the other income line of c.N6n which offset an operating loss of –N4.4bn. This income was attributable to delayed reimbursements under the Petroleum Support Fund. In Q1, interest expense advanced by around 2.8x y/y as short-term borrowings grew by 61% y/y to N55.1bn during the quarter.
The firm’s underlying performance over the last two quarters has been underwhelming and is indicative of headwinds the industry currently faces. Given the firm’s current financial burden and rising cost of operations, we have cut our EPS estimate over the 2019-21E period by 34%. We forecast flattish y/y sales growth and a significant (-95% y/y) decline in earnings for 2019E. As at Q1 2019, receivables from the federal government were c.N19bn.
Even though we acknowledge potential upside risks, we have had to discount the impact that payments could have on the firm’s P&L given the uncertainties surrounding government payments. Our new price target of N152.0 is down -23% and implies a downside potential of -6.2% from current levels.
Hence, we have downgraded our recommendation on the stock to Underperform from Neutral. Year-to-date, Total shares have shed –20.2%, underperforming the NSE ASI by a similar magnitude. The stock is currently trading on a 2019 P/E of 147.3x for an average EPS decline of around 251% over the next two years primarily due to base effects.
Total posted a Q1 2019 loss after tax of –N474m
Besides sales which increased marginally, all key line items on the P&L worsened on a y/y basis. Total posted a loss before tax and loss after tax of –N418m and –N474m respectively.
The primary drivers behind the disappointing results were a 193% y/y rise in net finance expenses to N1.8bn and a double-digit increase in operating expenses to N6.8bn. The only tangible positives for the period were a gross margin expansion of +581bps q/q to 10.5% and a -22% q/q fall in operating expenses. Compared with our forecasts, while Q4 sales of N77.4bn were in line with our estimate, Total’s loss before tax of –N418m significantly missed our N2.4bn forecast.