ARDOVA: Analysts Recommend Buy on Expectation of Sales Recovery
In the first half of the financial year 2020, Ardova Plc revenue rose 5% year on year to ₦87.3 billion, which was 2% below Vetiva’s analysts’ estimate.
Thus, analysts forecasted ₦29.26 price target for the company’s stock, though net profit for the financial year 2020 is projected to drop 15.4% to ₦3.3 billion. What that means is that since the share outstanding is expected to stay at 1.302 billion, earnings per ordinary share(EPS) ranking for dividend would fall at the same rate.
Unaudited results for the period showed that Ardova’s after-tax profit fell 81% to ₦1.0 billion on account of weak sales due to the outbreak of the coronavirus pandemic. Traded at ₦12.15 per share, Ardova’s market capitalisation settled at ₦15.825 billion, though year to date the company has lost more than 30% of its stock value.
The company’s carrying value of the total asset was valued at ₦45.341 billion as of the first half of 2020, of which 14.33% of this amount was debt-financed. Vetiva capital said for context, the firm noted that one-off income lines such as subsidy-related income and gains from asset disposal boosted H1’19 earnings after tax to ₦5.5 billion.
For instance, the sale of fuels, the largest contributor to the topline, dropped 12% year on year and 34% quarter on quarter to ₦31.7 billion. Vetiva capital had estimated ₦33.4 billion revenue for the period. Also, lubricant operations posted a 17% decline in sales to ₦3.6 billion as against Vetiva analysts’ estimate of ₦3.9 billion.
Vetiva stated that With the onset of a market-reflective price regime for Premium Motor Spirit (PMS) in March, Q2’20 gross margin edged higher to 7% compared to 6% in Q2’19.
However, gross profit remained almost flat at ₦2.6 billion as against ₦2.5 billion in Q1’19, dragged by the revenue slide. Analysts said despite inflationary pressures witnessed during the quarter, Ardova recorded remarkable cost containment. The company’s unaudited financial statement showed that operating expenses dropped by 43% year on year to ₦1.8 billion.
This drove operating expenses as a percentage of sales ratio down to 5% in Q2’20 as against 8% in the comparable period in 2019. Consequently, the company earned an operating profit of ₦787 million compared with an operating loss of ₦246 million recorded in a similar period in 2019.
Explaining further, analysts said finance costs unsurprisingly declined by 70% year on year to ₦239 million.
This feat, according to analysts, is a result of management efforts to deleverage the balance sheet. For context, Ardova debt balance dropped to ₦6.5 billion as of H1:2020, a steep drop from ₦15.7 billion in H1:2019. Unfortunately, the company’s profit after tax slipped 76% in Q2:2020. Meanwhile, Vetiva analysts highlighted that Q2:2019 based was strengthened by subsidy income of ₦3.9 billion.
In the second half, volume upticks to drive topline growth:
“Given that the downstream industry is predominantly characterized by little or no product differentiation, we view Ardova’s Q2:2020 performance as impressive, as other notable industry players have turned in losses amidst the pandemic shock”, Vetiva said.
Looking ahead, Vetiva stated that it anticipates a much better performance in the second half, as it believes the continual relaxation of social distancing restrictions, especially in Lagos, would lead to significant recoveries in sales volumes in the coming quarters.
More so, analysts said they see further upticks in gross margin, as the government continues to maintain a wider spread between the ex-depot and selling prices of PMS, compared to 2019 levels.
That said, analysts at Vetiva revised 2020 estimates for Ardova’s performance to reflect the misses in Q2 and expectations for the second half.
Vetiva said: “Our 2020 projections for fuel and lubricant sales have been revised to ₦165.9 billion from ₦159.2 billion in 2019 and ₦16.0 billion from ₦17.2 billion respectively.
Vetiva analysts trimmed the forecast for operating expenses-to-sales ratio to 5% from 6%, bringing operating profit to ₦4.9 billion. “All in, we see Ardova reporting a net profit of ₦3.3 billion in 2020 compare with ₦3.9 billion reported in the comparable period”, Vetiva stated.
ARDOVA: Analysts Recommend Buy on Expectation of Sales Recovery was put together by Julius Alagbe