Conoil Still Holds Value despite Plunged Profit – Cowry Asset

Conoil Still Holds Value despite Plunged Profit – Cowry Asset

Conoil Plc stock has been rated hold by Cowry Asset Management due to limited upside potential estimated below 10%.

Cowry explained that the firm’s HOLD recommendation is hinged on two main factors – expected rise in pump price and sustained operating efficiency.

Traded at ₦15.25 per share, analysts set the company price target at ₦16.50

Conoil Plc churned out weaker operating performance in H1 2020 as its revenue was hard hit amid strict restrictions on movements, particularly at the inception of Q2 2020, due to COVID-19 pandemic fears.

Hence, its profit after tax (PAT) plunged year-on-year by 67.20% to ₦0.34 billion – as both white products and lubricants were impacted.

Analysts at Cowry Asset said they observed that performance across players in the sub-sector was also weak due to the pandemic.

Meanwhile, it was noted that activity in the industry was relatively volatile in H1 2020, as FG began partial implementation of market-based pricing regime amid declining crude oil prices.Conoil Still Holds Value despite Plunged Profit – Cowry Asset

Also, oil marketers are now allowed to import Premium Motor Spirit.

“Going forward, we expect revenue in the second half (H2) of 2020 to be better than that of H1 2020 given the two-time increase in pump price to around ₦148.70 in August, from ₦123.00 in April”, Cowry Asset noted.

The firm handed ‘A’ rating on Conoil, said amid the challenges in the sector, Conoil’s performance amongst other players was above industry average based on financial ratio analysis.

Liquidity Challenge, Weak Performance Should be Short-lived

In addition to the weak profitability, analysts explained that Conoil Plc appeared to be grappling with liquidity issues given the dwindling cash & cash equivalent assets and the rapid rise in non-trade creditors.

However, analysts said they observed that Conoil Plc is efficiently managing its liquidity challenge as it strategically exposed itself to non-interest bearing liabilities to reduce its relatively high interest-bearing borrowings.

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Specifically, the company’s cost of debt stood at 15.75% in H1 2020.

So, borrowings and finance costs fell year on year by 65.36% and 62.80% to ₦3 billion and ₦0.25 billion respectively.

Cowry Asset stated that despite Conoil’s liquidity issues, declining revenue and possible lower profit which may lead to a cut in dividend payout in FY 2020, it recommend a ‘HOLD’ position in expectation that the challenges should be short-lived.

“We expect Conoil’s profit and liquidity to improve as the pump price rises in tandem with the rising crude oil prices and as fuel consumption grows”, Cowry Asset explained.

The firm stated that given the current partial deregulation of the Nigerian downstream sector and removal of subsidies, it noted the possibility that significantly higher fuel prices could reduce the purchasing power/effective demand of the consumer.

“We expect competition among oil marketers for the consumer’s wallet to also thin their profit margins in the medium to long run during which we expect players to increase their current capacity”, Cowry Asset reckoned.

The HOLD recommendation is however hinged on two main factors which include expected rise in pump price and sustained operating efficiency.

As the Global Economy Continues to Improve:

Against the backdrop of an improved global demand for oil amid the continued resumption of economic activities, Brent crude spiked by 134.71% to USD45.37 a barrel as at August 19, 2020.

This registered a significant uptick from a year low of USD19.33 a barrel as at April 21, 2020 around when the pandemic triggered an oil demand shock.

Meanwhile, as countries continue to ease lockdown, Cowry Asset stated that it expects demand for transportation fuels – for commuting, international flights and shipping – to rise.

In the August edition of its Monthly Oil Market Report, the Organisation for Petroleum Exporting Countries (OPEC) forecast OECD demand for crude at 45.77 million barrels per day (mbpd) in Q4 2020, higher than 44.13 mbpd forecast for Q3 2020.

Operating Efficiency Sustained:

Cowry Asset said in its equity note that Conoil has consistently been an efficient player in the rather low-margin Nigerian retail space and so naturally, the investment firm believes the company should record increased profitability with increase in pump price.

Analysts stated that over the span of nine years (from 2011 – 2019), the downstream player, on average, outclassed its competitors (listed on the Nigerian Stock Exchange).

Conoil delivered gross profit margin of 11.5% was higher than industry average of 9.4% and operating profit margin of 4.5% compare to industry average of 4.4%.

However, its return on equity was lower at 11.6% compared to an industry average of 18.7%.

Cowry Asset explained that this was essentially due to higher interest expenses as a significant borrower, large part of the company’s operation was financed with borrowed funds.

In its unaudited result for the H1:2020, Conoil’s average debt to capital settled at 40.4%, higher than industry average of 34.8%.

However, given recent efforts to lower its cost of debt (borrowings plunged year-on-year by 67% to ₦3.2 billion in H1 2020), and the opportunity to refinance its borrowings at lower interest rate, Cowry Asset stated that it expects ensuing savings to boost its bottom line.

Conoil Still Holds Value despite Plunged Profit – Cowry Asset


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