ARDOVA: Analyst Lifts Target Price on Anticipated Earnings Surge

ARDOVA: Analyst Lifts Target Price on Anticipated Earnings Surge

ARDOVA Plc: Despite the fact that a weaker gross margin bites the company’s performance in the first quarter, Vetiva’s analysts Luke Ofojebe lifted the target price by more than 11%. Vetiva estimates the company’s future price at ₦34.34 compared to the initial position of ₦30.86.

In its recently released first quarter (Q1’20) results, Ardova Plc grew turnover 22% year to ₦52.1 billion. This was in line with Vetiva estimate of ₦52.2 billion, as management continued its drive to expand the company’s footprint in the fuel space.

Notably, Ardova’s fuel business reported a 25% growth in Q1’20 to ₦47.8 billion, coming in line with analyst’s estimates. However, on a quarter on quarter basis, fuel turnover declined 2%.

This reflected the decision of the Petroleum Product Pricing Regulatory Agency (PPPRA) to cut the regulated pump price of premium motor spirit (PMS). Due to dwindling global prices of oil, and resultant impacts on petroleum landing cost, pump price was cut from ₦145/litre to ₦125/litre in March.

Analysts stated that Ardova’s lubricant performance trailed expectation for the quarter, as revenue from this segment remained relatively flat at ₦4.2 billion. This was Vetiva estimate of ₦4.5 billion but showed a 4% quarter on quarter drop, bringing total revenue to ₦52.1 billion.

On the other hand, the company’s cost of sales was pressured during the quarter to ₦49.3 billion, rising 25% – a steeper pace than revenue growth.

That said, gross profit slid 9% to ₦2.8 billion following the fall in gross margin to 5% as against 7% in Q1’19. Ardova recorded better operational efficiency over the course of the quarter, as the operating expenses/sales ratio came in lower at 5.0%. This means that the operating expenses to sales ratio dropped below Vetiva’s estimates of 5.2%, coming from 5.4% in Q1’19.

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This improvement was tallied with comments from management on Ardova 2020 cost containment strategy at our last corporate visit in March. However, operating profit dropped significantly to ₦737 million, down 81%, as a gain of ₦2.6 billion from asset disposal in Q1’19 created a high comparison base.

Vetiva’s analyst stated that following the deleveraging exercise witnessed through 2019, finance costs slid 69% to ₦263 million. Specifically, Ardova’s debt sharply dropped to ₦5.5 billion in Q1’20 from ₦19.8 billion in the comparable period in 2019.

Then, profit before tax and profit after tax came in at ₦580 million, which was quiet below ₦3.1 billion Q1’19 and ₦497 million which was also below ₦3.3 billion Q1’19.

Vetiva analysts forecast that fuel margin improvement will drive 2020 earnings growth In its review, analysts said Ardova’s Q1 earnings were largely dragged by the 200 basis-points drop in gross margin. This, according to Vetiva was strong enough to subdue the effect of improved operational efficiency witnessed in the quarter.

“Looking forward, we foresee better performance for the remainder of the year, majorly due to price adjustments along the PMS supply chain”, Vetiva stated.

The firm’s explained that it has lowered the financial year 2020 estimate for fuel revenue to ₦180.2 billion from ₦188.3 billion. This was largely due to the reduction in PMS pump price to ₦125/litre.

In this business segment, for the financial year 2020, Vetiva’s analyst Ofojebe however raised the firm’s gross margin expectation to 10% from 6%.

This followed the reduction in the ex-depot price of PMS to ₦108/litre by the Nigerian National Petroleum Corporation (NNPC) in May. Taking a cue from Q1 outcome, coupled with anticipated weaker economic activity in subsequent quarters, Vetiva trimmed its 2020 forecast for lubricant revenue growth to 2%

The firm had forecasted 8% growth, thus resulting in total revenue of ₦197.7 billion from ₦207.1 billion. The revised projections equate to a gross profit of ₦23.1 billion from ₦15.5 billion, double the figure recorded last year. With analysts estimate for finance costs remaining relatively unchanged at ₦1.1 billion, expect profit after tax to surge to ₦8.5 billion.

This, coming from an estimated ₦4.1 billion in the previous review, translates to a return on average equity (ROAE) of 42% from 23%. Vetiva stated that it has raised the future price to ₦34.34 from ₦30.86; thus maintain the BUY rating on Ardova’s shares.

ARDOVA: Analyst lifts price target on anticipated earnings surge