August 3, 2021/Cordros Report
TOTAL remains our top pick in the oil and gas downstream sphere, given its market leadership status and robust distribution network (over 560 outlets; 23.0% of major marketers’ outlets). As evidenced so far in 2021, TOTAL has leveraged its scale in making up for the pandemic-induced slump in earnings in 2020. As of H1-21, PAT grew by 41.8% y/y while ROE improved to 5.4% from 4.0% in 2020FY. Also, free cash flow generation surprised positively in 2021, given the lower capex outturn so far. For the rest of 2021, we expect sustained growth in earnings. Following the revisions to our forecasts, we have raised our price target to NGN226.50/s but retain our “HOLD” rating. We estimate a 2021E DPS of NGN15.22, translating to a dividend yield of 6.7%.
Impressive topline supports H1 performance: TOTAL’s revenue returned to its pre-pandemic level as it grew by 132.1% y/y in Q2-21 and 41.8% y/y in H1-21. The growth was driven by a solid performance across the business’ three segments – Network (+43.1% y/y; 71.0% of revenue), General Trade (+305.0% y/y; 24.0% of revenue) and Aviation (+893.2% y/y; 5.0% of revenue). We attribute the increase across the business lines to (1) an increase in demand given that the economy has effectively reopened, (2) higher PMS prices (Average price: NGN167.18/litre in H1-21 vs NGN137.60/litre in H1-20) relative to Q2-20 and H1-20, and (3) TOTAL’s ability to substantially push out volumes given its vast storage and distribution channels.
We Remain Optimistic for H2: As the economy has effectively reopened, we believe demand for petroleum products in the year will return to pre-pandemic levels. As such, we forecast 33.6% revenue growth in 2021FY. Over the medium term (2022–2025FY), we model average annual revenue growth of 10.5%, given our expectation that TOTAL will sustain its volume expansion drive. We estimate gross margin will decline by 200bps to 13.0% in 2021E, given (1) the pass-through impact of the rise in crude oil prices on costs of production and (2) inflationary pressures due to structural inefficiencies and currency weakness. However, we expect the topline growth to support EBITDA and EBITDA margin and cushion the pressure from higher operating expenses. Thus, we project 2021E EBITDA and accompanying margin will increase by 64.3% and 113bps, respectively. We forecast EPS of NGN18.56 in 2021E, implying growth of 205.4% y/y compared to the decline in 2020FY (-9.5% y/y). Further out, we forecast an EPS CAGR of 10.6% in 2021-2025FY. Our EPS forecast aligns with Bloomberg consensus estimate of NGN18.00 in 2021FY.
Valuation: The net impact of our changes is an adjustment in our price target to NGN226.50/s – implying a 11.5% potential upside. We estimate TOTAL trades on 2021E P/E and EV/EBITDA of 12.2x and 5.4x; a discount to MEA O&G peers 19.2x and 9.6x, respectively.