Culled—Proshare
December 8, 2016/FBNQuest Research
Downgrading to Underperform
In Q3 2016, Mobil Oil Nigeria (Mobil) delivered stellar y/y earnings growth. However, the q/q trend, which showed declines for key P&L line items, provides a better pointer for Q4. Q3 sales and earnings both declined by 22% q/q and 49% q/q respectively, reflective of lower product volume sales following petroleum product price increases in Q2.
The federal government had announced a gasoline price hike of c.50% to N145/litre in May. Although we had anticipated a contraction in gross margin in Q3 as relatively cheaper products sold off, the magnitude of the contraction, by -350bps y/y to 13%, was surprising.
Compared with our estimates, Q3 earnings missed by 41%. As such, we have cut our EPS forecasts over the 2016-17E period by 8% on average. Our new price target of N193.2 is lower by c.1.5%.
In the past month Mobil shares have rallied strongly (up +70% vs ASI: -5%) following the announcement that Nipco Investments, an indigenous downstream oil and gas company, will pay US$301m for ExxonMobil Nigeria’s 60% interest in Mobil Nigeria.
The financial consideration follows Nipco’s earlier execution of a sales and purchase agreement with ExxonMobil for the acquisition of over 216 million ordinary shares in October.
Assuming the deal is concluded at an exchange rate of between N300/US$ and N350/US$ (FX rate not disclosed), the agreed sale price works out at N417-487/share, a significant premium to Mobil’s closing share price of N219.41 before the announcement. For now, we believe that market’s expectation for a tender offer is premature.
At current levels, we see an implied downside potential of -40%. As such, we downgrade our recommendation on the stock from Neutral to Underperform. The shares are currently trading on a 2016E P/E multiple of 16.2x for flattish EPS growth in 2017E. Year-to-date Mobil shares have appreciated +102%, outperforming the NSE ASI by around 112%.
Q3 2016 PBT and PAT up 73% y/y and 80% y/y respectively
Mobil reported Q3 2016 results which showed that sales of N21.6bn were up 60% y/y while PBT and PAT grew by 73% y/y and 80% y/y to N2.0bn and N1.3bn respectively.
Sequentially, sales, PBT and PAT all declined by 22% q/q, 48% q/q and 49% q/q respectively. Compared with our estimates, Q3 sales came in behind by 9% while PBT was behind by a much wider margin of 48%.
The steep gross margin contraction which surprised negatively was the primary driver behind the comparatively weaker earnings. 9M sales of N71.9bn grew by 59% y/y, while PBT and PAT were also up, by 62% y/y and 57% y/y respectively.
