Eterna Plc

ETERNA PLC

Company Overview
ETERNA was founded in 1989 but started operation in 1991. It was converted to a public company in 1997. This change culminated in the listing of its shares on the Nigerian Stock Exchange in the following year. ETERNA manufactures lubricants and petrochemicals, and sells crude oil and imported petroleum products. It is the sole licensee of BP-Castrol lubricants in Nigeria.

Lenux Integrated Resources Limited has a 19.2% shareholding in the company while Global Energy Engineering & Raw Materials Limited holds 13.8% of its outstanding shares.

Mr. Lamis Shehu Dikko chairs an eight-man board of directors while Mr. Mahmud Tukur is the managing director.

Investment Thesis
The lubricants business segment has witnessed a stable revenue growth. Lubricants sales increased by 31.3% compared to the previous period’s figure of 41.3% on a 3-Year Compound Annual Growth Rate (CAGR) basis. Lubricants produced 28% of Profit Before Tax (PBT) despite accounting for less than 5% of total revenue. In addition, it has a better gross profit margin of 29.7% compared to 0.8% of crude oil sales. Its PBT and Profit After Tax (PAT) margins stood at 13.2% and 9.4% respectively compared to 8.3% and 5.1% of the year before. We believe that more investment in this segment of the business will improve profit margins going forward when one considers the fact that the company’s major business is typically a low-margin business. High cost of sales is responsible for low gross profit margins.Earnings chart of Eterna Plc

The sale of crude oil, on the average, accounted for 65.1% of ETERNA‘s total revenue between 2012 and 2017. Crude oil sale has grown by 26.1% in the past three years; however, it accounted for 13.1% of PBT in 2017. Revenue from the sale of fuel was more or less flat in the year but it has grown by 26.9% on a 3-Year CAGR basis.

ETERNA‘s total debt dropped 6 percentage points to 16.3% of total assets from 22.3%. Operating profit covered interest obligations 5.9 times while cash flow from operations covered it 0.6 time. Debt obligations may exert pressure on the company’s short-term liquidity or result in the accumulation of more debts because most of its loans are short-term in nature.

We are of the opinion that ETERNA has manageable debts; sales revenue is rising notwithstanding the low profit margins.

Valuation
ETERNA‘s Book Value Per Share (BVPS) and Earnings Per Share (EPS) averaged NGN5.80 and NGN0.90 respectively. Earnings Power Value (EPV) stood at NGN6.20. A share of the company should produce a dividend yield of 10.7%. Our valuation of ETERNA is between NGN6.80 and NGN9.00 per share.

Financial Overview
Revenue increased to NGN173 billion from NGN106.9 billion. Revenue expansion was largely driven by sale of crude oil which leaped by 129.6% when contrasted to a 25.6% decline of the previous year. Both rising price and volume are responsible for growing crude oil sales. Though total revenue rose by 61.9% year-on-year, gross profit dipped 26%.  This is attributable to high cost of sales which made up 96.3% of turnover (2016: 92%). Operating profit which jumped by 432.4% to NGN6.4 billion in 2016 lost 50.8% in 2017. However, PBT was NGN2.8 billion up from NGN2.4 billion climbing 17.2% . In like manner, PAT increased by 35.5% compared to 15.6% of the prior period.Graph of returns of Eterna Plc

Gross profit margin shed 4.4% to close at 3.7% at 2017 year end. PBT and PAT margins were 1.6% and 1.2% respectively. Return on Equity (RoE) rose by 2.4% to 16% in 2017 while return on Assets ( RoA) of 4.1% was 0.5% lower than the figure for 2016,the previous year.

Shareholders’ fund of NGN12.4 billion was a 14.7% improvement on the previous year. Total debts accounted for 63.2% of shareholders’ fund. Total debt outstanding on 30th June, 2018 was NGN6.5 billion out of which 83.7%  must be paid within a year. The management intended to raise a short-term debt of NGN10 billion to shore up its working capital. This would impact its operating profit and gearing ratio.

Business Risk
Crude oil trading, the company’s  leading business segment, is subject to price volatility as the crude oil price is determined by the interplay of demand and supply. Moreover, input costs have a negative effect on profitability as they form over 90% of revenue.

The sale of imported fuels, which has averaged about 30% of revenue in the last six years, is largely financed by borrowing. Debt obligations put downward pressure on the profitability and profit margins. And the company cannot increase the price of the fuels it imports to widen its profit margin as this is the exclusive right of the Petroleum Products Pricing Regulatory Agency.

While lubricants and chemicals segment has growing revenue and a cost-to-turnover ratio hovering around 70%, revenue from this business segment constitutes less than 5% of total revenue.

Recommendation: Buy

Vital statistics of Eterna Plc