May 4, 2021/Cordros Report
Event: ARDOVA published its Q1-21 unaudited results at the close of business last week Friday (30 April), reporting EPS of NGN0.66 (vs EPS of NGN0.38 in Q1-20). Adjusting for the gain on disposal of its upstream and power generation subsidiaries, the company reported an EPS of NGN0.65 (vs Adj. EPS of NGN0.17 in Q1-20).
Revenue declined by 19.3% y/y, following a 22.8% y/y decline in revenue from its flagship fuels business segment (87.9% of revenue). In its earnings release note, management cited the PMS supply challenges that oil and gas marketers faced in the quarter as the major drag to the topline. Across the other business segments, the lubricants and greases (11.3% of revenue) line grew by 12.1% y/y, further highlighting the benefits of the partnership deal with Shell for the exclusive distribution rights of its lubricants. Also, revenue from the LPG & cylinder sales segment grew by 112.7% y/y, while the revenue from the solar business declined by 38.7% y/y. ARDOVA’s new haulage and transportation services subsidiary, Axles and Cartage Limited, accounted for 0.8% of revenue in the period.
On a q/q basis, revenue decreased by 21.9%, underpinned by lags across all its business segments – Fuels (-24.1% q/q), Lubricants and Greases (-2.0% q/q) and LPG and cylinder sales (-18.8% q/q) – save for the solar business (+41.6% q/q) and haulage and transportation services (+23.0% q/q).
Gross margin (+261bps) came in higher at 8.0%, as cost of sales (-21.6% y/y) declined faster than revenue (-19.3% y/y). Management attributed the reduced costs to its efforts to optimize core assets and improve operational efficiency. We note that the fuels business (+289bps to 6.0%) contributed the bulk of the margin accretion, following the higher price for PMS (Average PMS price: NGN145.39/litre in Q1-20 vs NGN167.67/litre in Q1-21) in the review period.
Adj. EBITDA (+110.3% y/y) and adj. EBIT (+212.6% y/y) surged in the period, owing to the increased gross margin and a 20.4% y/y decline in operating expenses. We highlight that the operating expense to revenue ratio inched lower by 6bps to 4.9% (Q1-20: 5.0%), indicative of strong operational efficiency by management. Consequently, adj. EBITDA and EBIT margins expanded by 266bps and 253bps to 4.3% and 3.4%, respectively.
Net finance costs increased by 56.9% y/y, despite a decline in finance costs (3.2% y/y), primarily due to an 89.8% y/y decline in finance income (Q1-21: NGN11.04 million vs Q1-20: NGN108.01 billion).
Overall, the company recorded an adj. PBT outturn of NGN1.19 billion in Q1-21 (vs adj PBT of NGN303.05 million in Q1-20). Following a NGN339.62 million tax expense, the company recorded adj. PAT of NGN850.07 million (vs adj PAT of NGN220.35 million in Q1-20).
Comment: We like that ARDOVA improved its gross margin considerably in the face of reduced revenue. We are also impressed that the company sustained the cost efficiency measures put in place last year, which supported profitability in the quarter. Nonetheless, we are concerned about the decline in revenue, especially on a q/q basis, which comes despite the improvement in economic activities. YTD, ARDOVA is up +10.3%, compared to the Oil & Gas index (+19.7%), and the broader All-Share index (-1.1%). Our estimates are under review.
*Adj = Adjusted **Adjusted = removal of non-recurring/one-off items