GOIL Company Limited

GOIL COMPANY LIMITED

Company Overview
GOIL Company Limited, formerly Ghana Oil Company Limited, started as a private limited company on June 14, 1960. It operates in the downstream sector of the oil and gas industry in Ghana; it deals in petroleum and related products such as diesel, gasoline, kerosene, marine gas oil, aviation fuel, liquefied petroleum gas and lubricants. The company was changed to a public company in 2007 and was listed on the Ghana Stock Exchange (GSE) in the same year. Presently, the Government of Ghana is the largest shareholder of the company with 34.2% of outstanding shares.

The management grows the business through acquisition and expansion of its operations. The company acquired more service stations in the year in order to strengthen its distribution network. It has branched out by joining forces with Exxon Mobil Exploration and Production Ghana (Deepwater) Limited. This partnership would afford GOIL the opportunity to benefit from the upstream sector in Ghana.

Mr. Kwamena Bartels chairs the nine-member board in performing its oversight functions. Mr. Kwame Osei-Prempeh was appointed acting managing director on 3rd June 2019. Mr. Kwame replaced Mr. Patrick Akorli who had served the company for twenty-three years.

Investment Thesis
Revenue and profits have been increasing over the years but profit margins have remained low. Low profit margins are attributable to high cost of sales. The company has beefed up its distribution by acquiring more service outlets during the year. This, in our opinion, gives the company the opportunity to increase its sales volume and offset the effect of the low profit margins. Again, the company is constructing a bitumen plant and three LPG Gas-Recirculation LPG Gas-Recirculation plants in Tema, Kumasi and Tamale. These plants are expected to improve earnings after their completion.

Goenergy Company Limited (GOENERGY), the companyꞌs subsidiary, has helped the company to increase its sales volume. GOENERGY is a bulk distribution company that supplies other oil companies and helps GOIL meet the supply requirements of its customers.

The wide and expanding distribution network bodes well for GOIL.   It had sales per share of GH¢14.6 in 2018 compared to GH¢11.9 of the prior year. Return on Equity (RoE) stood at 18.7% while Return on Assets (RoA) was 6.1%. Despite its expansion programme, GOIL has a manageable debt; debt has grown by only 5.4% on a 3-year Compound Annual Growth Rate (CAGR) basis.

The shares of GOIL offer investors a very good expected return.

Valuation
GOIL trades at 10.5 times earnings, 2 times book value and 0.2 times sales at the end of 2018. We put the fair value of GOIL between GH¢2.9 and GH¢4.3 per share. Currently, GOIL is trading below our fair value estimate.

Financial Overview
GOIL has been growing its gross earnings consistently. Gross revenue leapt 22.1% in 2018 compared to 13.6% in the year before. The gross revenue of GH¢5.7 billion translates to a compound annual growth rate of 29.2% over the past 10 years. Gross profit moved up to GH¢287.1 million in 2018 from GH¢202.8 million in 2017, gaining 41.6% in a year. Operating profit added 49.9% to the prior yearꞌs figure of GH¢80.4 million. Profit Before Tax (PBT) and Profit After Tax (PAT) of GH¢114.1 million and GH¢81.9 million respectively was tantamount to 35% and 25.9% increment.

High direct costs, which comprise customs duties and cost of sales, impacted gross profit margin negatively.  Cost of sales formed 84.3% of gross revenue while customs duties and levies produced 10.7% of gross revenue.  Consequently, gross profit margin was 5% in 2018 having gained less than 1% year-on-year.

Operating expenses are low compared to revenue. Operating expenses to turnover averaged 3.6% in the last twelve years. Operating profit margin hovered around 1.8%; PBT margin averaged 1.7% and PAT margin averaged 1.2%.

Total assets expanded by 32% and shareholdersꞌ fund grew by 58.1% in the past three years. Current and acid test ratios were 0.9 and 0.8 respectively. Capital spending as a result of expansion has increased by 29.2% in three years. Total loan at 2018 year end was GH¢117.3 million compared to GH¢54.3 million of 2017. Total loans formed 26.7% and 8.7% of shareholdersꞌ fund and total assets respectively. In addition, GOIL generates a lot of profit and cash flow from its operations to pay off interest on loans.

Business Risk
GOIL faces regulatory risks as the National Petroleum Authority (NPA) oversees activities in the petroleum downstream sector.  Exchange rate and crude oil price fluctuations affect the cost of imported petroleum products. Competitive pressure and NPAꞌs control of petroleum prices restrict the ability of GOIL to increase prices arbitrary in order to widen its margin.

Recommendation: Buy