August 18,2016/FBNQuest Research

Strong all round performance in Q2
Total Nigeria’s (Total) Q2 2016 performance was better than expected. Sales and earnings both grew, 65% y/y and 211% y/y respectively. Access to fx for imports and an inventory load-up of relatively cheap stock were the primary drivers. The stock has rallied by 36% (vs. NSE ASI’s -5%) over the last month.

The major outcome of the FG’s recent review of the petrol pricing template and adoption of a price modulation policy are 1) the government has restated its preference to discontinue the subsidy program, 2) there are now two key pricing variables – gasoline prices on the international market and the prevailing fx rate and 3) an end to import quotas.

To our minds, the third point is likely to have far reaching consequences on the industry’s structure, as scale, a solid distribution network and a strong balance sheet are pre-requisites to compete. As such, we expect Total and other major marketers to benefit from the new reality. Given the strong performance in H1, we have raised our EPS forecasts over the 2016-18E period by 40% on average.

We estimate an EPS growth of 300% y/y (given the soft performance in H2 2015) and a dividend yield of c.15% in 2016E. Our dividend payout ratio est. of 80% is in line with Total’s five-year average. Total surprisingly declared an interim dividend of N3.00 in Q2 which implies a dividend yield of 1.2%. We had forecasted at an interim of N2.00 for Q3.

Although we have rolled forward our valuation to 2017, our new price target of N219.0 is only up 5%, primarily because we have raised our risk free rate assumption by 200bps to 14.5%.

From current levels, we see an implied downside potential of -13%. The shares are currently trading on a 2016E P/E multiple of 5.3x for EPS decline of -60% in 2017E. Given the stock’s strong rally over the last month we have downgraded our recommendation from Outperform to Neutral.

PBT and PAT both up 169% y/y and 211% y/y resp

In Q2, while sales grew 65% y/y, PBT and PAT were both up 169% y/y and 211% y/y. Sales from service stations (Retail), which accounted for around 70% of the group’s topline, were up by 69% y/y to N60.3bn.

Additionally, sales for the Aviation and General Trade segments were also up 90% and 36% respectively to N11.7bn and N13.6bn respectively. A gross margin expansion of 445bp y/y to 16.3% and a 75% y/y reduction in net finance charges led to the PBT growth of 302% y/y.

Sequentially, sales, PBT and PAT were all up 44% y/y, 137% and 116% y/y respectively. Compared with our estimates, while sales beat by 69%, PBT was ahead significantly.