Total Nigeria Plc

TOTAL NIGERIA PLC

Company Overview
TOTAL, a major player in the downstream sector of the Nigerian economy, was incorporated as a private limited company in 1956. It was converted to a public limited liability company in 1978 and listed on the Nigerian Stock Exchange the following year. The primary activity of TOTAL remains the marketing and distribution of refined petroleum products. It boasts of over 560 service stations and 3 lubricants blending plants.

TOTAL derives great benefits from the technical and managerial expertise of its parent company, Total Raffinage Marketing (France), which holds 61.7% of its outstanding shares. The company recently upgraded its capacity to produce lubricants that have had impressive contribution to revenue.

Mr. S. Mittelman (French) is the chairman of a nine-man board of directors while Mr. Jean-Philippe Torres(French) is the company's managing director. Prince J.E. Nnamani  resigned as executive director and was reappointed as a non-executive director  during the year under consideration ( 2017).

Investment Thesis
The downstream sector remains a dominant sector in the Nigerian economy. Over the past three years, TOTAL has grown its gross and net earnings at a Compound Annual Growth Rate (CAGR) of 6.2% and 14.9% respectively. We expect firm demand for petroleum products, especially petrol, diesel and gas, as the sector's products are essential and needed on a daily basis. The unpredictable power supply will continue to boost demand for the sector's products, just as consumers shift from using electricity to generators.Earnings chart of Total Nigeria Plc

In addition, the deregulation of the sector is expected to improve performance and further propel growth. The federal government has granted licences for the establishment of private refineries in the country. This is expected to boost local oil refining, reduce importation of petroleum products, ease pressure on the exchange rate of the naira and reduce the need to subsidise the products by the government.

Costs associated with getting refined products are the major costs for participants. As government controls and regulates prices, profit margins tend to be low. TOTAL's gross profit and operating profit margins averaged 12.4% and 3.8% over the last ten years. The ten-year average cost of sales to turnover ratio stood at 87.6%. The participants' inability to pass on the costs by increasing their prices impacts negatively on profitability. Consequently, selling and distribution expenses are low as petroleum marketers have slight incentive to improve their competitive position.

TOTAL has upgraded its lubricants production capacity in a bid to improve their contribution to earnings. We expect the sale of lubricants to boost revenue going forward. Over the past three years, revenue from lubricants and other products has gained 19.3% while revenue from petroleum products has only risen by 4.3%. In addition, the company is exploring other markets in Africa in order to bolster its revenue and margins going forward. In 2017, it sold products worth NGN526.1 million to Gabon and Cameroon.

We believe that the shares of TOTAL are overpriced.  Its EBITDA margin of 4.1% is lower than the 7.8% of the preceding year while dividend yield of 0.1% is not enough compensation for the shareholders. We expect a three-year total return of  28.7% on a share of TOTAL.Graph of returns of Total Nigeria Plc

Valuation
Trailing P/E (Price/Earnings) is estimated at 8.4 times while it traded at 2.8 times book value at 2017 year end. A share of the company brings in a sale of NGN848.4 and price to sale ratio has been less than 1. Adjusted Earnings Power Value is NGN117.3. We arrived at a fair value between NGN135.1 and NGN148.1 using Discounted Cash Flow valuation. A share of TOTAL ranges from NGN121.5 to NGN155.8 when we used Dividend Discount Model. In a nutshell, it is trading above our fair value estimate.

Financial Overview
Revenue declined marginally by 0.99% year-on-year, gross profit was down 40.3% though cost of sales rose by only 7%. Petroleum products produced 83.5% of total revenue while lubricants and other products were responsible for the remaining 16.5%. Sale of petroleum products decreased by 4.5% while the sale of lubricants and other products increased by 21.9%. Operating profit dipped by 57.2% from NGN19.5 billion to NGN8.3 billion. Profit Before Tax (PBT) and Profit After Tax (PAT) lost 42.1% and 45.8% respectively.

Gross profit margin of 10.2% represents a loss of 6.7%  in a year and trails its 10-year average by 2.2 percentage points. Operating profit margin closed at 2.9% compared to 6.7% of the previous period. Both PBT and PAT margins ended the year at 4.1% and 2.8% respectively. Cost of sales account for 89.8% of total revenue compared to 83.1% achieved in the prior year. Total assets of NGN108 billion tantamount to a loss of 21.1% between 2016 and 2017. However, the company has been growing its assets at a compound rate of 4.2% in the last three years.

Book Value Per Share, which has been increasing over the past 8 years, gained NGN13.7 to end the year at NGN83.1. Earnings Per Share (EPS) was NGN23.6 down from NGN43.6.  Return on Equity (RoE) declined to 28.4% from 62.8% while Return on Assets (RoA) of 7.4% shed 3.4% in a year.  Dividend yield was flat at 0.1%.

Cash flow from operation covered its interest obligations 2.5 times while operating profit covered it 2.7 times. Short-term liabilities have been exceeding short-term assets over the past 9 years.  Stock turnover has declined in the past three years and the stocks now stay takes more days before being sold out. Short term loans of NGN13.1 billion amounts to 12.2% of total assets and 46.5% of shareholders' fund. We are of the belief that TOTAL is not bogged down by debts and its long-term solvency is not in doubt.

Business Risk
Government is the chief regulator of the sector, dictating prices and margins. A complete deregulation of the sector will allow the market forces of demand and supply to determine prices, thereby promoting healthy competition with increased profitability and returns for market players. The sector's products are homogenous, with little brand loyalty, though customers generally patronise companies with splendid service delivery.

Recommendation: Sell

Vital statistics of Total Nigeria Plc