March 25, 2019/Cordros Report
Event: MOBIL published Q4-18 and 2018FY results after close of market on Friday, with EPS decline of 50.0% y/y in Q4. The y/y EPS decline was weighed by higher operating expenditure and cost of sales, both of which offset the increase in revenue. On the 2018FY EPS of NGN25.87 (+24.1% vs. 2017FY), the board has proposed a final dividend of NGN8.25/s, which equates to a yield of 4.85% on its last closing price.
Q4-18 revenue grew by 6.9%/ y/y, with the NNPC increasing the availability of petroleum products to major marketers over 2018. Compared to Q3-18 however, revenue only grew by a marginal 1.1%.
The quarterly revenue trend is revealing of stagnating volumes; -9% in Q2, -4% in Q3, and +1% in Q4. From a local consumption perspective, demand has clearly been weak, as economic activity continues to straggle. Our findings from our channel checks reveal that most of the consumption data published by government sources are inflated with “exports” that are being diverted elsewhere. The higher under-recovery, combined with excess product volumes imported to the country, is inducing smuggling activities to neighbouring countries where arbitrage opportunities exist, as pump prices are 149% higher, on average. Also revealed was that the government, via the NNPC, manages pricing across the deregulated segments — AGO, DPK, and ATK — where it holds a significant market share, thus, further constraining margins. This suggests that barring a major improvement in the macros, pump price hike or full price deregulation, the company will not achieve a meaningful revenue growth in 2019.
In Q4-18, CoGs grew at a faster pace of 10.3% y/y, reflecting the increase in petroleum product landing costs amidst higher global crude prices (+11.7% y/y on average) and resulted in gross profit decline of 16.8% y/y. Gross margin during the period came in at 9.6%, recovering from a record low 8.8% in Q3, but still a significant 274bps lower on a y/y basis.
OPEX surged 31.0% y/y in Q4-18, with the ratio-to-revenue coming in at 8.4% (the highest since Q1-17). OPEX is conventionally high in the final quarter, but last year’s absolute value (NGN3.34 billion) is the highest on record. The full year result shows a huge 50% increase in volume related expenses (38% of total OPEX), which is not clear at this stage, what period of the year it was incurred. An additional NGN436.84 million, not present in 2017FY, for Advert and Promotion (4% of total OPEX), with no breakdown yet, was also record. This compounded the weaker gross margin, and decline in other income (-4.9%), and resulted in EBIT declining by 52.4% y/y.
MOBIL recorded net finance income of NGN55.53 million (-52.8% y/y) in Q4-18 following a 34.4% y/y decline in interest income and 312.2% y/y increase in interest expense on overdraft facilities.
Compared to Q3-18, EPS was down 39.8%, driven by higher OPEX (+27.4%) and decline in rental income (-7.3%). Effective tax rate in the quarter was 28.9%, down from 32.5% and 32.4% respectively in Q3 and Q2.
Comment: MOBIL’s Q4 EPS is unimpressive, in our view. For the full year, MOBIL’s EPS and EBIT are above 2017FY (+24.1% and +1.2% respectively), but only due to the absence of the previous year’s exceptional charge (adjusting for the charge, EPS would have been down by 4.3% y/y), reflecting a weak operational performance in the period, amidst the still challenging operating environment. We foresee a negative reaction. NOT RATED. Ongoing initiation.
