TotalEnergies Marketing Nigeria Plc

TOTALENERGIES MARKETING NIGERIA PLC

Ticker:                          TOTALNature of Business:              Petroleum & Petroleum DistributorsLocation :                          Nigeria
Recent Price:           NGN191.5052-Week High/Low: NGN213.90/75.10Estimated Fair Value:  NGN148.10-NGN161.34
Expected Return:  17.6%Consider Buy:                       Below NGN148.10Business Risk:            Average
Financial Risk:      AverageEconomic Moat:                  WeakCorporate Governance: Strong

Company Overview
TotalEnergies Marketing Nigeria Plc (TOTAL), a major player in the downstream sector of the Nigerian economy, was incorporated as a private limited company in 1956. It was changed to a public limited liability company in 1978 and listed on the Nigerian Stock Exchange the following year. TOTAL is engaged in the marketing and distribution of lubricants, solar and refined petroleum products. It boasts of over 500 service stations and 2 lubricant blending plants in Nigeria.

TOTAL, a member of the TotalEnergies Group, now provides solar products for home and industrial use. Its solar products include solar lamps, Sunlight 18200 Bronze and Sunlight Eris 3kva inverters. This is in line with the resolve of the parent company to become a sustainable energy company and reduce its carbon footprint.

Total Marketing Services, formerly Total Raffinage Marketing (France), holds 61.7% of its outstanding shares. TOTAL recently upgraded its capacity to produce lubricants that have had an impressive contribution to revenue.

Mr. Stanislas. Mittelman (French) is the chairman of the board of directors while Mr. Imrane  Barry (Guinean) is the company's managing director. Chief F. Majekodunmi and Mr. O. Hahn ceased to be directors of the company in the year 2020.

Investment Thesis
The downstream sector remains a dominant sector in the Nigerian economy. Over the past three years, TOTAL’s gross and net earnings have decreased at a Compound Annual Growth Rate (CAGR) of 10.8% and 36.4% 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.

In addition, the deregulation of the sector is expected to improve performance and further propel growth. The Federal Government of Nigeria 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.

The costs associated with getting refined products are the major costs for participants. As the government controls and regulates prices, profit margins tend to be low. TOTAL's gross profit and operating profit margins averaged 12.6% and 3.7% over the last twelve years. The twelve-year average cost of sales to turnover ratio stood at 87.4%. The inability of market players to pass on the costs by increasing their prices impacts negatively on profitability. Consequently, selling and distribution expenses are low as petroleum marketers have a slight incentive to improve their competitive position.

TOTAL has upgraded its lubricants production capacity in a bid to improve its contribution to earnings. We expect the sale of lubricants to boost revenue going forward. Revenue from lubricants and other products has gained 0.1% on a 3-Year CAGR basis (2019:9.5% rise) while revenue from petroleum products has fallen by 13.3% (2019: 1.5% fall). We expect sales to other markets in Africa to resume in order to bolster the revenue and margins of TOTAL going forward. In 2018, it sold products worth NGN743.1 million to Gabon, Cameroon, Congo and Niger. The African Continental Free Trade Area agreement should help TOTAL penetrate other countries in Africa.

We believe that the shares of TOTAL are overpriced.  Its Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) margin of 4.9% is lower than the 5.6% of the preceding year while the dividend yield was 4.7%.  We expect a return of 17.6% on a share of TOTAL.

Valuation
We arrived at a fair value between NGN148.10 and NGN161.34 for a share of  TOTAL. It is currently trading above our fair value estimate.

Financial Overview
Revenue declined by 29.9% year-over-year to NGN204.7 billion on the back of a drop in the sale of petroleum products. The sale of petroleum products decreased by 34.8% year-over-year while the sale of lubricants and other products shed 6.9%. Petroleum products produced NGN157.1 billion or 76.7% of total revenue while lubricants and other products were responsible for the remaining NGN47.7 billion or 23.3%. Gross profit was down by 12.3% even though the cost of sales shrank by 32.3%.  Operating profit dipped by 64% from NGN9.8 billion in 2019 to NGN3.5 billion in 2020. However, Profit Before Tax (PBT) and Profit After Tax (PAT) lost only 5.3% and 9.5% respectively due to a huge reduction of interest on debt.

The gross profit margin of 15% represented a gain of 3% in a year and surpassed its 12-year average by 2.4 percentage points. Operating profit margin closed at 1.7% in the year 2020 compared to 3.4% of the previous year. Both PBT and PAT margins ended the year at 1.4% and 1% respectively. Cost of sales accounted for 85% of total revenue compared to 88% achieved in the prior year. Total assets of NGN143.6 billion were tantamount to a rise of 6.4% year-over-year. However, the company has grown its total assets at a compound rate of 10% over the past three years.

Book Value Per Share (BVPS), which closed at NGN82.91 at 2020 year-end, has declined for two consecutive years after nine years of uninterrupted growth.  Earnings Per Share (EPS) was NGN6.08 down from NGN6.71 of the previous year.  Return on Equity (RoE) declined to 7.3% from 8.1% while Return on Assets (RoA) shed 25 basis points to 1.4% in a year. The dividend yield was 4.7% in 2020, down from 6.1% in 2019.

Cash flow from operations covered TOTAL’s interest obligation 15.4 times in 2020 while operating profit covered it 1.2 times. Short-term liabilities have been exceeding short-term assets.  Stock turnover has been declining in the past two years and the stocks now take more days before being sold out. Short-term loans of NGN33.1 billion amounted to 23.1% of total assets and 117.7% of shareholders' fund. Though the debt level has risen in the past three years, we are of the belief that TOTAL’s long-term solvency is not impaired.

Business Risk
Government is the chief regulator of the sector, dictating prices and margins. 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

Earnings Chart of Total Nigeria Plc

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