ARDOVA’s Move Into Clean Energy, M&A Raise Earnings Expectation
ARDOVA Plc, a downstream oil sector player, gets a buy rating from equity analysts at CardinalStone Partners Limited after the company’s recent strategic move into a full-fledged energy business.
As well, the decision to close an acquisition deal with Enyo in the second half of 2021 also swings analysts’ mood in a positive direction as there are indications that CardinalStone would bet largest on the ticker.
In its equity note on the ticker, analysts said they retained their buy recommendation as the investment firm’s medium to long term outlook for ARDOVA remains positive.
Analysis of the company’s book indicated that the positive feeling was however driven by recent moves to diversify the business away from the highly regulated PMS market, analysts said they retain deregulation as an upside risk.
“We have updated our forecasts for the financial year 2021 and revised our target price to N19.20”, analysts at CardinalStone Securities told Investors in a report.
Sector Review
Citing the PPPRA template released in March 2021, analysts said petrol was supposed to be sold at a pump price band of N209.61 – N212.61/litre, representing about a 30.0% premium to the current market price of N162.00/litre.
“Given that crude oil price has raced to about $65.91/barrel and the Naira has weakened to about N411.67/$, PMS should be trading around N227.00/litre, suggesting a N65 subsidy per litre or monthly support of N114 billion, assuming daily PMS consumption of 58.4 million litres.
“This computation implies a potential annual subsidy outlay of about N1.4 trillion or about 18.3% of Nigeria’s 2021 budgeted revenue”, CardinalStone said.
The potential impact on household consumption costs has led several stakeholders to wail against outright subsidy removal. Bloomberg reports reveal that Nigeria is unlikely to phase out subsidies until the protracted negotiations with its organised labour are completed.
What is clear is that the federal government has committed to a three-way plan to cushion the impact of a potential switch to complete deregulation on the populace.
CardinalStone expressed the view that subsidy cost is getting heavier. Noting that delay in implementing deregulation of PMS in Nigeria may be explained by the government’s concerns over surging inflation, its impact on the cost and standard of living, and the potential backlash from the populace.
For ARDOVA, analysts said imminent business combination and partnerships are likely to be the critical drivers of profit after tax in 2021. In January 2021, ARDOVA announced that it was in discussions to acquire one of its competitors in the downstream oil sector – Enyo Retail & Supply Limited (ENYO).
ARDOVA’s Move Into Clean Energy, M&A Raise Earnings Expectation
By its business profile, Enyo is a technologically driven player and currently operates over 90 stations across Nigeria, attending to over 100,000 retail customers daily across 15 states of the country. Analysts believe that the imminent combination is set to increase ARDOVA’s retail outlets by about 20% to 555 from 465 previously.
“The acquisition will cement ARDOVA as the market leader in the marketing and distribution of PMS in the country”, CardinalStone stated.
According to ARDOVA, the deal will be financed with a mix of equity and debt, with the related completion timeline set at second half of 2021. The firm also started re-venturing into previous business areas to diversify its operating earnings from concentration in the regulated PMS market
Revitalising the renewable business
Recall that before the ARDOVA takeover by the new management, the company had a “Solar System” business line which analysts said was contributing around 0.5% to group turnover at its peak.
However, after the takeover, the business was discontinued because its market penetration was low, and it was facing intense competition in the space.
Now, ARDOVA has made a re-entry into the renewable energy industry in Q4-2020, penning a partnership with Mobile Power UK to establish a Battery as a Service (BaaS) solution company (Mobile Power Limited) in Nigeria.
“ARDOVA Plc. will hold a 35.0% stake in the new company”, CardinalStone said in a report made available to its clients.
“Unlike existing renewable energy services specialising in the sale and installation of solar panels and battery packs, Mobile Power (MoPo) will provide a pay-per-charge rental model to supply smart battery packs at a price affordable to low-income households”.
In their explanation, analysts at CardinalStone explained that MoPo will have hubs where battery packs will be recharged and leased onto consumers.
“Even though the jury is still out on the likelihood of success of the segment, the critical state of power supply, particularly in a low-income neighbourhood, suggests that there may be some opportunities to tap into with this venture”, the investment firm added.
In 2020, ARDOVA invested about N50.9 million into Mobile Power. Representing 1% of its capital expenditure, ARDOVA Plc. invested N50.9 million in mobile power in the financial year 2020, CardinalStone revealed.
Also, the company announced its entry into the marketing and distribution of LPG in Q4-2020, following in the steps of another major marketer – MOBIL, which resumed its LPG business in 2018 after previously exiting the segment 20 years before.
Analysts said ARDOVA has completed a 600MT tank station in Kano and has revealed that plans are underway to construct an LPG storage facility.
The construction of the 20,000MT LPG storage facility in Ijora, Lagos, commenced in Q4-2020, and it is billed to be completed in 18 to 24 months.
Analysts said the facility would enable the company to benefit from the government’s imminent autogas drive, targeted at providing an alternative to PMS for motor vehicles. In addition, ARDOVA could also provide Storage as a Service (SaaS) for other LPG operators and generate throughput income.
Other strategic partnerships
ARDOVA launched a haulage and transport subsidiary, Axles and Cartage Limited, to have better end-to-end control & efficiency of the supply chain of its most important products (PMS, AGO, ATK and LPG).
It was noted the firm also struck a partnership with Shell Trading International Limited, enabling it to become the sole distributor for Shell Lubricant branded products in Nigeria.
“We project earnings before interest, tax, depreciation, and amortisation (EBITDA) margin higher at 3.4% in 2020 compare to 2.9% in 2019, owing to projected higher contribution from relatively margin accretive business lines – AGO, ATK, Lubes, and LPG.
“Our margin projection is also aided by expectations of sustained optimisation of core assets, as seen in the financial year 2020”, CardinalStone said.
In addition to the rollout of margin accretive Ardova Clean Energy hubs across the country, the firm is expected to complete the upgrade and revamp of its Lube Operating Blending Plant and Bitumen Plant.
Overall, CardinalStone Securities Limited estimated a 4.2% year-on-year growth in after-tax earnings, despite a projected 35.8% increase in interest expense.
“We expect ARDOVA to draw down N20 billion from its planned N60 billion borrowing programme in the second half of 2021”, analysts said.
BUY recommendation:
After considering development in the downstream oil sector and ARDOVA specific earnings profile, CardinalStone Securities maintained buy rating on the company’s stock.
“Our medium to long term outlook for ARDOVA remains positive, driven by recent moves to diversify the business away from the highly regulated PMS market (we retain deregulation as an upside risk).
“We have updated our forecasts for 2021 and revised our target price to N19.20”, CardinalStone stated.
ARDOVA’s Move Into Clean Energy, M&A Raise Earnings Expectation
