Major downstream player TOTAL (‘or the company or the firm” from henceforth) released its unaudited financial result for H1-2021. The rebound in economic activities in H1-2021, juxtaposed against the low base of H1-2020, which was plagued by lockdowns and restrictions, resulted in double-digit y/y revenue increase for the major petroleum product marketer.  Revenue grew by 41.7% y/y to N151.3bn in H1-2021. Cost margin improved to 83.0% in H1-2021, from 88.4% in H1-2020, as higher PMS and Lubricants sales volume improved economies of scale. Furthermore, the rebound in Sales boosted Gross profit and Operating profit by 105.3% y/y and 1843.0% y/y to print at N25.5bn and N8.0bn, respectively. Overall, the company recorded a Profit before and after tax of N11.7bn and N8.0bn respectively (vs Profit before and after-tax of N796.2mn and N537.1mn respectively in H1-2020). The firm proposed an interim dividend of N4.00 per share. Below, we highlight key details of the downstream operator’s performance and our expectations for H2-2021 and beyond.

Rebound in economic activities boost sales:  In H1-2021, TOTAL’s Revenue performance improved  strongly, as removal of movement restrictions drove increased demand for PMS and other white products. Compared to the pandemic-induced low base from last year, it created a greater y/y effect as Revenue was up by 41.7% y/y to N151.3bn in H1-2021. Total sales from petroleum products grew by 36.1% y/y to N114.0bn, which made up 75.4%, whilst sales from Lubricants and others rose by 62.4% y/y to N37.2bn in H1-2020. Lubricant sales made up 24.6% of Revenue in FY-2020.

All major segments bounce back in H1-2021: On its business segments, TOTAL experienced an increase in sales across all its reporting segments. Network sales (56.0% in H1-2021 vs 71.0% in H1-2020 of total sales), which measures sales at service stations, increased by 11.5% y/y to N84.7bn. General trade (34.0% of total sales), which tracks sales to corporate customers, grew by 126.9%, following the reopening of corporate spaces. Revenue from its Aviation segment (10.0% of total sales) improved by 183.7% y/y to N12.2bn, which showed stark evidence of the base effects, as domestic and international travel restrictions were lifted following an initial halt during the outbreak of the pandemic in 2020. 

Cost efficiency & Other income supports operating performance: Although Cost of Sales increased as a direct result of improved sales, decent growth in sales allowed TOTAL to strengthen margin levers in H1-2021, as improved sales in its lubricants segments and PMS segment improved its economies of scale in the period under review. Consequently, the firm’s cost margin was lower at 83.0% in H1-2021 vs 88.4% in H1-2020.

Gross profit margin improved to 16.5% in H1-2021, from 11.6% in H1-2020, a direct consequence of improved lubricant sales in revenue mix, which drove a 201.7% y/y increase in Gross Profit to N14.0bn. Similarly, TOTAL’s Operating profit printed 589.0% y/y higher, owing to improved Revenue, cost efficiency and a 217.5% y/y increase in Other income. The increase in Other income was driven by a 68.3%  increase in sundry income (income from convenience store, rental and other income) and net foreign exchange gain of N986.4mn  in the period under review. 

Lack of petroleum subsidy inflows dampens Net finance income:  In H1-2021, TOTAL began to feel the positive impacts of its Q4-2020 Commercial paper issuance. We recall the company secured short term financing worth N12.75bn at a discount rate of 2.0%. This reduced the company’s need to rely on bank overdrafts for its financing needs. As such, the company’s average interest rate paid on overdraft and bank charges fell to 6.4% per annum vs 8.5% per annum in 2020. Overall, Finance cost moderated by 19.9% to N664.8mn  in H1-2021.

However, a 97.1% y/y drop in Finance income in H1-2021, following the absence of any petroleum subsidy income inflow, triggered a 303.3% decline in Net finance income in H1-2021. Nevertheless, the strong operating performance ensured the company recorded a Profit before and after tax of N7.4bn and N5.2bn, implying growth of 1855.8 % y/y and 1465.95% y/y,  respectively. The company proposed a N4.00 per share as an interim dividend payment for H1-2021.  

Increased sales see improvement in net operating cash flows: Elsewhere, we note that the company’s cash position improved in H1-2021 as net cash from operating activities continued to improve. Net cash from operating activities grew 107.5% y/y to N24.9bn from N12.0bn in H1-2020. The firm’s improved cash position largely stemmed from an improved operating position in 2021, bolstered by improved sales and a 47.8% decline in trade payables in the period under review. Finally, the company’s leverage position (using debt/equity) improved to 103.2%, In H1-2021, from 122.2% in FY-2020.  

Outlook for TOTAL – We expect rebound to remain steady but higher base from H2-2020 will smoothen out recovery    

Our outlook for the downstream oil and gas sector remains moderate. Our position is predicated on a continued rebound in demand for petroleum products and lubricants. However, we expect the low base effect from 2020 to ease in H2-2021. The continued reluctance by the FGN to adopt total deregulation in the market continues to affect the profitability of downstream firms. As such, our revenue and cost estimates remain in line with previous forecast in our FY-2020 review.

Recent estimates by the United Capital Research team and the NNPC indicate that the FGN through the NNPC is currently spending about N150.0/litre to subsidise the price of petrol. In addition, recent data from the NNPC showed that thus far in 2021, the government has spent 56.3% of NNPC’s total Gross Revenue to cover the shortfall between the ex-coastal and landing pricing of PMS. Also, on the downside, persistent FX challenges, which allows NNPC to remain the sole importer of petrol in the market, would mean that TOTAL, for the most part, will only earn just a distributors’ margin and is unable to capitalise on wholesaler’s margin as the NNPC remains the wholesaler in the country.

With regards to the Petroleum Industry Act (PIA) and deregulation, we remain cautiously optimistic as the PIB repeals the Petroleum Products Pricing Regulatory Agency and transfers tariff pricing powers to the newly created Midstream and Downstream regulator. The bill in clause 122 highlights that “any pricing tariff framework with regards to petroleum pricing shall be cost-reflective, in the foreign currency or naira equivalent in which the respective initial cost was incurred determined at the open naira market rate published by the Central Bank of Nigeria as applicable under the regulations”. Lastly, the latest version of the bill deleted the repeal of the Petroleum Equalisation Fund (PEF), which posits downstream firms sell PMS at uniform prices across the country, essentially hurts the free-market assumption and full cost recovery clause in section 122 of the bill. For lubricants, we are partly optimistic concerning the growth of TOTAL’s lubricant business. Considering the FX challenges its competitors will face in 2021, we expect TOTAL to leverage on its group structure for FX sourcing, as its lubricants sales segment remains more profitable than the PMS segment. We expect TOTAL to retain its market share in this segment.

We modelled for TOTAL, incorporating the current market dynamics/fundamentals, where most downstream firms earn just a retailer’s margin. We also modelled with a forward-looking risk premium and with an anticipation of a lower yield environment later in the year, considering the recent downward pressure on interest rates. Overall, this led to favourable adjustments to our cost of equity. Also, at current prices, although TOTAL appears undervalued in regulation to its peers, with a P/E ratio of 6.2x vs 9.3x for ARDOVA, considering TOTAL has a ROE and EPS of 36.2% and N23.76 vs 13.0% and N1.77 for ARDOVA. Consequently, we review our year-end target price for TOTAL upwards to N250.4 per share from N170.0 per share, with an upside of 25.6%, from its current price of N199.1 per share.

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