ARDOVA: Expansion Effort to Yield Benefits amid Deregulation

ARDOVA: Expansion Effort to Yield Benefits amid Deregulation

Ardova Plc, a Nigeria integrated energy company, earnings was greatly affected by virus-induced economic lockdown in the first half of 2020.

The impacts was massive such that improvement in the third quarter of 2020 failed to lift earnings meaningfully.

However, analysts view that Ardova expansion drive will be beneficial to the future performance of the company amidst deregulation in the sector.

In its recently released 9M-2020 results, Ardova Plc grew its revenue by 4% to ₦128.2 billion, which was below Vetiva estimate of ₦139.7 billion.

In an equity note, analysts at Vetiva Capital stated that although net income which came soft at ₦1.9 billion for the nine-month period was lower than ₦5.3 billion reported for comparable period in 2019.

However, it indicated a marked improvement from a 9M-2019 normalised loss after tax of ₦1.9 billion after adjusting for the normalised effects of one-off items.

Following the implementation of softer lockdown measures in Q3, improved demand for petroleum products saw fuel sales rebound 15% quarter on quarter to ₦36.5 billion, although flattish as demand remains relatively weaker compared to a year ago.

Also, gross margin in fuel operations jumped about 3 percentage point year on year to 7%, largely a reflection of Premium Motor Spirit (PMS) deregulation.

Similarly, Ardova’s lubricant business posted an impressive growth of 21% quarter on quarter, reverting to a pre-pandemic level of ₦4.3 billion, and ahead of Vetiva estimate of ₦4.1 billion.

That said, Ardova’s aggregate revenue for Q3 came in flat at ₦40.9 billion.

Vetiva explained that despite inflationary pressure witnessed in Q3, Ardova operating expenses only grew 4% year on year to ₦2.3 billion.

This was below ₦2.7 billion projected by Vetiva capital in the period. Thus, this takes 9-Months operating expenses down 13% year on year to ₦6.7 billion.

As a result, analysts said Q3 operating profit came in at ₦1.4 billion – which is more than twice the figure a year ago.

Vetiva said, Ardova has indicated intention to continually reduce the company’s debt.

Analysts however added that this was evidently noticed in the Q3 result, as Ardova balance sheet showed that the management has completely paid of the company’s bank overdraft worth ₦2.4 billion.

This bring outstanding debt balance down to ₦4.3 billion compare with N6.5 billion in the first half of 2020, and ₦8.3 billion in Q3-2019.

Consequently, analysts stated that finance expenses dropped off 64% to ₦217 million, which was lower than ₦237 billion projected by Vetiva capital.

Overall, the indigenous oil marketer turned in a net income of N875 million, although lower than ₦1.1billion projected by Vetiva, but it shows a turnaround from loss position.

In the Q3-2019, Ardova had reported ₦191 million loss.

“Looking ahead, we believe Ardova is well positioned to reap the benefits of Petroleum Motor Spirit (PMS) deregulation.

This is underpin by the company’s aggressive drive to expand footprints in Nigeria’s downstream sector over the last few years.

For instance, analysts noted that fuel revenue grew at an organic average growth rate of 47% from 2017 to 2019, significantly higher than it peers within the same period.

However, in 2020, we see fuel revenue printing lower at ₦155.9 billion, down 2%, dragged by lockdown induced slump in Q2 fuel sales.

Meanwhile, analysts forecast for Ardova’s lubricant operations has been revised slightly higher to ₦16.5 billion compare to ₦17.2 billion in 2019.

This takes analysts forecast to for 2020 total revenue to ₦172.4 billion, translating to 2% drop year on year. 

“In addition, we expect Q3 run rate for gross margin to be sustained in Q4, equating to a full year gross profit of ₦12.9 billion as against ₦11.3 billion in 2019, consequently resulted to after tax profit of ₦3.1 billion”, Vetiva stated.

Overall, analysts explained that the firm’s revised projection for Ardova culminate in a 12-months target price of ₦29.72, hence, recommend buy rating on the stock.

ARDOVA: Expansion Effort to Yield Benefits amid Deregulation