Analysts raise Seplat’s target share price 38% on Eland acquisition

Analysts at Vetiva Capital Management Limited have estimated that Seplat’s share price would surge on the acquisition of Eland.

The stronger Seplat is expected to rake in year revenue to $1 billion mark. It recently announced full acquisition of loss-making Eland, a public company listed on the Alternative Investment Market (AIM) board of the London Stock Exchange.

Vetiva analysts however revised Seplat’s 2019 return on equity to 18% compare to previous estimate of 16%, resulting in a target price of ₦1,191.19 as against previous estimate of ₦863.50.

Investors currently think Seplat worth N304.225 billion on the floor of the Nigerian Stock Exchange at N517 per share on total share outstanding of 588, 44,561.

Seplat stock has negative year to date return of 19.22%, it share price opened in 2019 at N640 which happened to be the highest price level in 2019 before it dropped to N397.70, the lowest point reached up till date from the beginning of the year.

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Eland primary focus is on oil production and development in the Niger Delta region of Nigeria. It emerged as a player in Nigeria’s oil industry through the acquisition of a 45% equity stake in Oil Mining Lease (OML) 40 in 2012 and subsequently purchasing a 40% stake in Ubima field in 2014.

As of March 2019, Eland’s working interest 2P oil reserves stood at 40.7 million barrels (MMbbls), comprising 37.0 MMbbls from OML 40 and 3.7 MMbbls from the Ubima field.

A closer look at Eland’s financials reveals that the firm had been a loss-making entity since inception, posting its first after-tax profit of $148 million which was boosted by a $70 million net tax credit in 2018.

The losses recorded in prior years were largely due to periodic heavy spend on oilfield development, leading to gross losses between 2013 and 2017, with a record after-tax loss of $30 million in 2016.

In the first half of financial year 2019, Eland’s figures show that the firm reported a turnover of $106 million which was 57% increase, a reflection of a 29% jump in oil output.

Inversely, earnings moderated to $33 million compare to $45 million in the first half 2018, dragged by a surge in other non-operating expenses to $5.2 million (H1’18: $0.7 million) and a much lower tax credit recorded during the period.

The proposed offer comprises a cash consideration of $382 million for the entire equity of Eland, the equivalent of 166 pence per share, which represents a 28.5% premium to Eland’s closing share price on October 14, 2019.

In relation to Eland’s book value, Seplat’s offer is 11% premium. The acquisition is expected to be financed partly by cash and debt.

Thus, Seplat’s financial year 2019 forecast for oil output has also been revised to 36.4 kb/d as against 23.4 kb/d.

Evidently, the proposed acquisition comes with several positives for Seplat’s operations, Vetiva Capital analysts think.

They stated that at the fore of these positives is the expected surge in Seplat’s 2P oil reserves -working interest- to 267.3 MMbbls compare to 226.6 MMbbls in financial year 2018.

They also highlighted that, post-acquisition; Seplat’s oil output will jump to 38 kb/d, resulting in a 2019 oil output average of 36 kb/d. In 2018, the indigenous oil company’s output was 24 kb/d.

Vetiva analysts said their estimate for Seplat’s 2019 gas output remains unchanged at 146 Million standard cubic feet per day (MMscfd) as Eland is currently not involved in gas exploration.

But noted that another major plus for Seplat is Eland’s use of the Trans Forcados Pipeline (TFP) as its major export pipeline—a more reliable pipeline than the Nembe Creek Trunk Line.

In recent time, Nembe emerged as one of the most vandalized pipelines in the Niger Delta region.

Vetiva analysts’ projections for Seplat are hinged on the assumption that the acquisition process will be completed before December 31, 2019.

They also expect Seplat’s consolidated turnover to come in stronger at $1,002 million in 2019, indicating a 33% rise from the pre-acquisition estimate.

Likewise, analysts expect Seplat’s 2019 profit after tax to come in at $344 million as against previous estimate of $268 million, and $147 million in 2018, translating to an EPS of $0.58 compared to previous estimate of $0.46, and $0.25 in 2018.

Vetiva reiterates its BUY rating on the counter.

Analysts raise Seplat’s target share price 38% on Eland acquisition by Julius Alagbe

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