November 1, 2021/Cordros Report

ARDOVA published Q3-21 results after market close on Friday (October 29), reporting a Loss Per Share of NGN0.41 (vs EPS of NGN0.67 in Q3-20) on higher costs and weaker margins. On an annualized basis, the company’s 9M-21 EPS is 11.2% below 2020FY EPS of NGN1.42 and trailing our 2021E EPS forecast of NGN2.41 by 90.8%.

Revenue (+6.2% y/y) was higher in Q3-21, stemming from substantial increases in its flagship businesses – Fuels (+16.4% y/y), Lubricants and greases (+66.2% y/y), Solar system (+75.7% y/y) and LPG & cylinder sales (+330.4% y/y). The outturn reflects the improved demand in the economy and higher product prices (Average PMS price: NGN165.22/litre in Q3-21 vs NGN151.15/litre in Q3-20; Average DPK price: NGN410.58/litre in Q3-21 vs NGN343.35/litre in Q3-20; Average AGO price: NGN253.22/litre in Q3-21 vs NGN222.00/litre in Q3-20); Average LPG price: NGN450.30/kg in Q3-21 vs NGN395.01/kg in Q3-20).

On a q/q basis, revenue grew by 10.2%, supported by growth in the fuels (+12.5% q/q) and lubricants and greases (+10.9% q/q) segments.

Gross margin (-313bps) declined to 5.7% in the quarter, owing to faster growth in the cost of sales (+24.9% y/y) relative to revenue (+6.2% y/y). We attribute the increased costs to the uptick in crude oil prices (Average Brent price: USD73.23/bbl in Q3-21 vs USD43.34/bbl in Q3-20). Accordingly, ARDOVA’s cost-to-sales margin increased by 313bps y/y to 94.3% (Q3-20: 91.2%).

Stemming from the lower gross margin and a 13.2% y/y increase in operating expenses, EBITDA (-476bps) and EBIT (-464bps) margins came lower at 1.0% and 0.3%, respectively.

Net finance costs increased by 6.3% y/y, primarily due to a whopping 77.0% y/y increase in finance costs. The higher cost of debt is attributable to increased debts from overdrafts and other short-term borrowings.

Overall, the company recorded a loss before tax of NGN673.61 million (vs PBT of NGN1.25 billion in Q3-20). Following a tax credit of NGN132.36 billion, the company recorded a loss after tax of NGN541.25 million (vs PAT of NGN875.38 million in Q3-20).

Comment: ARDOVA’s Q3-21 performance lends credence to our view in our Q2-21 first glance report that the company may have lost some of the market share gained in 2020FY, especially in the PMS product line. Against the preceding, the reinstatement of the PMS price cap and expected cost pressures following the resilience in crude oil prices, we are concerned that the company may not deliver positive earnings in Q4-21. Therefore, we expect a negative reaction to the results. Our last communicated TP was NGN23.25, which implies a potential upside of 59.2%. Our estimates are under review.