May 17, 2022/Cordros Report
TOTAL’s Q1-22 result reflects the company’s sustained dominance in the downstream oil and gas space despite the challenges brought by the fuel crisis experienced during the quarter. We like that TOTAL was able to substantially grow its revenue from the higher-margin lubricant segment, effectively reducing its reliance on petroleum products (particularly PMS) as the primary revenue driver. We remain optimistic about TOTAL’s capability to deliver impressive earnings despite the plethora of challenges in the operating landscape, given its market leadership status, robust storage and distribution network and strong balance sheet management. Nonetheless, we highlight that the price cap on PMS and surge in crude oil prices will continue to inhibit margin expansion. Following the revisions to our forecasts, we have raised our price target to NGN344.06/s (prev.: NGN227.88/s) and upgraded the stock to a “BUY”. The substantial upward review in our TP echoes our optimism about the company’s earnings and highlights that the stock remains below its fair value despite the 61.7% price gain over the past twelve months. Nonetheless, TOTAL still trades at an EBITDA multiple of 1.2x, a significant discount to MEA peers average of 8.9x.
Resilient earnings in Q1-22 despite cost pressures: TOTAL carried into 2022 its stellar top-line outturn from 2021FY as revenue grew by 46.3% y/y in Q1-22, driven by the impressive growth across Lubricants & others (+91.3% y/y) and Petroleum products (+34.1% y/y) lines. Notably, revenue contribution from the Lubricants & others line increased to c. 31.0% (Q1-21: 24.0%)- its highest level on record – highlighting management’s strategy of maximizing its lubes sales. Accordingly, revenue across its business segments – Network (+10.8% y/y; 53.0% of revenue), General Trade (+125.6% y/y; 37.0% of revenue) and Aviation (+168.3% y/y; 11.0% of revenue) – all increased. Notwithstanding a dip in margins due to the surge in crude oil prices, TOTAL reported an EPS of NGN12.86 (Q1-21: NGN8.75), translating to a growth of 47.0% y/y.
Lube sales to support 2022FY performance: For 2022E, we expect TOTAL’s dominant market share across the white products portfolio coupled with higher lube sales to support top-line expansion. On the latter, we expect a favourable price/volume mix to influence the higher sales outturn. As such, we forecast that revenue will grow by 14.9% y/y in 2022E and model an average annual revenue growth of 9.8% over the medium term (2023-2026E). We model a 72bps y/y decline in the 2022E gross margin to 15.4%, reflecting cost pressures influenced by the spike in crude oil prices. We expect operating expenses to grow by 13.2% y/y; hence, we forecast a 140bps decline in EBITDA margin to 8.2% in 2022E. With a 72.0% y/y projected decline in net finance costs, we forecast a 5.6% y/y increase in EPS to NGN52.45 in 2022E (+717.2% y/y in 2021FY). Further out, we forecast an EPS CAGR of 9.1% in 2023E-2026E. We note that our 2022E EPS of NGN52.45 aligns with Bloomberg’s consensus estimate of NGN52.64.
Valuation: The net impact of our changes is an upward adjustment in our price target to NGN344.06 (previously: NGN227.88/s), implying a 46.7% upside and a total return of 56.7% after factoring dividend yield of 10.0%. Thus, we upgrade the stock to a “BUY”. On our estimates, TOTAL trades at a 2022E P/E and EV/EBITDA of 4.5x and 1.9x, a discount to the MEA peer average of 13.1x and 11.3x, respectively.