Culled—Proshare

April 10, 2018/Vetiva Research

• FY’17 gross profit dips 3% y/y despite decent topline growth

• Strong hold on OPEX, rental income lift operating earnings 11% higher

• Bottom-line declines 8% y/y on ₦2.2 billion extraordinary expense

• Ongoing investment by new core investor to support margins

• Valuation revised higher amidst lower risk free rate assumption

FY’17 EBIT up 11% y/y, PAT declines on extraordinary expense
11 PLC (Formerly Mobil Oil Nigeria) reported an 8% y/y decline in FY’17 PAT (₦7.5 billion), translating to an EPS of ₦20.85. Considering the tough operating environment of the Nigerian petroleum downstream sector over the course of the year, we see the full year numbers quite impressive as the reported PAT (amongst all other profit lines) came in 15% ahead of our estimate. It is noteworthy that the single digit y/y decline was due to an extraordinary expense of ₦2.2 billion earlier in the year.

Also impressively, the Board of Directors declared a dividend of ₦8.00/share (same as prior year) and ahead of our ₦6.00 expectation. Despite a 33% y/y rise in Revenue (₦125.3 billion vs. Vetiva estimate of ₦122.7 billion), the operational challenges within the downstream sector continued to weighed on earnings, with Gross Profit down 3% y/y to ₦15.3 billion (Vetiva estimate: ₦14.7 billion). However, following a more contained operating cost over the period (OPEX down 6% y/y, 5% better than Vetiva), FY’17 Operating Profit rose 4% y/y and 24% better than our estimate to ₦5.6 billion. Bottom-line was further lifted by Other Income (₦4.3 billion, up 8% y/y) from Mobil’s Real Estate business and Rental Income from service stations. Overall, EBIT for the year rose 11% y/y to ₦13.1 billion, beating our estimate by 14%.

Mid-long term outlook looking brighter, valuation revised higher
In line with our outlook for the downstream segment, we expect MOBIL to remain largely dependent on NNPC for PMS supplies in 2018 as landing cost remains above the regulated pump-price. As such we see limited upside for revenue growth even as we do not expect deregulation of the sector in the near term. That said, we welcome ongoing investment by new core investor, NIPCO investment (wholly owned subsidiary of NIPCO PLC), in other deregulated fuel products. Particularly, MOBIL is currently constructing a new ATK (Diesel) tank with a capacity of 20,000MT. We highlight that this is in line with the new management’s commitment of re-entering diesel import business which MOBIL had exited for a while.

MOBIL is also installing three additional pipelines for PMS, ATK and LPG. The company, over the course of 2017, also made investments towards upgrading its lubes blending plant and expanded its lubricants’ warehouse storage capacity. These investments are expected to be completed in 2018. Hence, we expect its impact on margins to be more visible from FY’19. In the meantime, we expect income from MOBIL’s Investment Properties to keep earnings resilient; we forecast a relatively flat growth in FY’18 EBIT at ₦12.8 billion (Previous estimate: ₦11.0 billion). Overall, we revise our FY’18 PAT estimate to ₦8.9 billion (Previous: ₦7.7 billion). Our target price has also been revised higher to ₦233.22 (Previous: ₦197.31), partly driven by lower risk free rate assumption.