August 12, 2021/Cordros Report

ARDOVA recorded a strong performance as it reported Q2-21 EPS of NGN0.70 (+79.2% y/y) bringing H1-21 EPS to NGN1.36 (+75.9% y/y). This strong earnings performance was supported by a higher gross margin (+172bps y/y; 9.0%). Annualized, the company’s H1-21 EPS is 91.4% ahead of the 2020FY EPS of NGN1.42 and 64.7% above our 2021E EPS forecast of NGN1.65. Notwithstanding, we are concerned that the company may have lost some of the market share gained in 2020FY, especially in the PMS product line, given the marketer’s slower top-line growth relative to peers. We expect the finalisation of the Enyo Retail and Supply Limited acquisition later in the year to support the regaining of some of the lost market share. We retain our “BUY” rating on the stock with a price target of NGN23.25/s.

Q2-21 revenue missed estimate; 2021E estimate is revised lower: Q2-21 revenue grew by 27.0% y/y, underpinned by substantial increases in income from the company’s fuels (+19.3% y/y; 84.5% of revenue), and lubricants & greases (+81.7% y/y; 14.5% of revenue) business segments. The growth in both business lines was supported by (1) improved demand given the reopening of the economy, (2) higher PMS prices (average price: NGN167.18/litre in H1-21 vs NGN137.60/litre in H1-20), and (3) higher volumes pushed out in the lubricants and greases segment (+14.2% y/y). However, H1-21 revenue declined by 0.6% y/y, resulting from a lower volume outturn (c.60.0% of H1-20’s volumes) from the fuels segment relative to the prior year, following supply constraints the marketer faced in Q1-21. We highlight that Q2-21 revenue of NGN44.78 billion tracked behind our estimate for the period (14.2% variance). For H1-21, there was a variance of 7.9% from our estimates. For 2021E, given the underperformance in H1-21, we revise our revenue growth expectations downwards to 7.7% y/y (Previous estimate: 14.0% y/y).

Higher margins expected for 2021E: Gross margin in Q2-21 expanded by 172bps y/y as it settled at 9.0%, with H1-21, gross margin settling at 8.5% (+233bps vs H1-20). The achieved margins in Q2-21 and H1-21 beat our expectations of 5.7% and 6.7%, respectively, with the variation stemming from the company’s strategy of maximizing the margins on its  CODO outlets, which was implemented to limit the effects of the reduced volumes in the period. Also, we highlight that a drop in ARDOVA’s cost-to-sales ratio to 91.0% in Q2-21 (-172bps) and 91.5% in H1-21 (-295bps) supported the higher margin print. Reflecting the CODO margin strategy and the lower cost-to-sales ratio in our model, we revise our 2021E gross margin estimate upwards by 115bps to 8.2%. Based on our expectations of a higher gross margin, we project 2021E EBITDA and accompanying margin will increase by 13.2% y/y and 16bps y/y, respectively. Against the preceding, we forecast EPS of NGN2.41 in 2021E, implying growth of 58.4% y/y compared to the decline in 2020FY (-52.5% y/y). Further out, we forecast an EPS CAGR of 7.7% for 2021-2025FY. Our EPS forecast is 9.5% higher than Bloomberg consensus estimate of NGN2.20 in 2021FY.

Valuation: Following the revisions to our forecasts, we have lowered our price target to NGN23.25/s, implying a 50.0% potential upside. Nonetheless, we retain our “BUY” rating. We estimate ARDOVA trades at a 2021E P/E and EV/EBITDA of 9.7x and 6.1x, respectively; a discount to MEA O&G peers 17.7x and 9.6x, respectively.