May 10, 2021/Proshare

by FBNQuest Research

Upgrading to Outperform from Neutral

Total’s Q1 ’21 results provide a solid perspective for the rest of this year. Total posted earnings of NGN3.0bn (up +90% q/q) which compare with losses after tax of -N163m in Q1 ’20. Cheaper financing and a -12% y/y decline in cogs helped offset lower y/y sales. Looking ahead, we have raised our EPS forecasts over the ’21-22f period by 159% on average. For ’21f, we now expect sales growth of 8% y/y to NGN220.5bn, helped by 5% y/y and 16% y/y increases in white products and lubricants sales. Our sales projections take into cognisance intense competition for market share in white products, particularly gasoline.  

Further down the P&L, we have cut our net interest forecast substantially to reflect the on-going implementation of the firm’s debt re-financing strategy. We deduce from management’s notes that average funding costs contracted by around -360bps y/y in Q1. Alongside a NGN30bn commercial paper programme, the company has authorisation to raise NGN20bn via bond issuance. Given the short-term nature of Total’s borrowings, the bond programme will provide more predictability for funding costs going forward. These adjustments are primarily responsible for the change to our EPS outlook.  

For now, we do not expect the current gasoline pricing methodology to have an adverse impact on Total’s P&L. In more strategic terms, Total continues to focus on building competence in the green energy arena while actively participating in transition fuels adoption. Our new price target of NGN216.0 is up 73% because we have raised our risk-free rate to 12.5% (10% prior) to reflect a higher yield environment, lowered long term sales growth (to 2% from 3% previously) and terminal EBIT margin (to 3% from 4.5% previously) assumptions because we expect steeper competition going forward. At current levels, our price target implies a potential upside of 52%. We upgrade our rating on the stock to Outperform from Neutral. Year-to-date, Total shares are up +9.2% (ASI’s -2.7%). 

Q1 ’21 results ahead of expectations, driven by lower cost of funds and GM expansion

Total’s Q1 sales declined -5% y/y to NGN66.7bn. However, PBT of NGN4.4bn and PAT of NGN3.0bn compare with losses before tax and after-tax of -NGN137m and -NGN163m respectively in Q1 ’20. The improved profitability was driven by a +618bps y/y gross margin expansion and an -87% y/y decline in net interest expenses. Compared with our forecasts, while sales missed by 3%, PBT beat significantly.  

For FY ’20, sales, PBT and PAT all declined -30% y/y, -5% y/y and -10% y/y respectively. Total proposed a dividend of NGN6.08, which works out to a yield of around 4%.