Equity Analysts Advise Investors on 57% Upside in ARDOVA’s Stock

Equity analysts at Meristem Securities Limited have advised Investors to Buy into 57% upside opportunity in Ardova’s stock.

Ardova Plc, an indigenous energy group, recorded a 22.31% year on year increase in revenue to ₦52.05 billion in the first quarter (Q1) of 2020.

Meanwhile, analysts at Meristem Securities Limited forecast that the downstream operator’s topline would come at ₦192.67 billion for the year.

Having lost 27.90% of its opening value year to date, Meristem Securities now sets ₦18.44 as Ardova’s price target for the year.

Equity Analysts Advise Investors on 57% Upside in ARDOVA’s Stock

Though the company’s stock traded at ₦11.75, with market capitalisation that settled at ₦18.86 billion.

The growth was off the back of a 24.61% increase in fuel sales in the quarter to ₦47.80 billion as against ₦38.36 billion in Q1:2019.

Analysts said the stronger petroleum products sales performance was driven by higher volumes and stronger market penetration in the period, with PMS sales rising by 34% since last year.

Meristem explained that the fuel business contributed 91.83% of total revenue, as the company leveraged on its wide retail network to boost sales.

Sales of lubricants and greases, which constituted 8.15% of total revenue inched higher by 1.44% to ₦4.24 billion compare to ₦4.18 billion in Q1:2019.

Despite the continued regulation of the PMS market was supported by recent partnerships with aviation lines as Aviation Turbine Kerosene (ATK) sales grew by 276%.

Given plans to spread its arms further across the energy value chain, analysts at Meristem said they expect a more diversified revenue stream, supporting the drive towards the company’s goal of having 20% contribution from renewables and higher-margin products by 2024.

“We however do not expect these plans to have much impact on revenue in the short term”, analysts stated.

In 2020, Meristem expects that the company will continue to take advantage of Prudent Energy and Services’ logistics to sustain the improved supply of white products across its retail stations.

Thus, the firm thereby forecasts that topline will come in at ₦192.67 billion in 2020.

Higher Direct Costs Weaken Margins:

Of an important aspect of the company’s operation is cost book. So far, this is rising, thus resulted to reduce margin.

Analysts stated that Ardova’s costs of sales rose significantly by 24.74% to ₦49.26 billion in Q1:2020.

This lowered gross profit by 9% year on year, and in effect the margin.

Specifically, gross margin came in lower at 5.36% compare to 7.20% in Q1:2019.

However, Fuels segment was the most expensive with a cost to sales ratio of 96.89% as against 94.55% in Q1:2019.

The Lubricants and greases business, which contributed 46.86% of total Gross profit had the lowest Cost-to-Sales ratio at 69.20% from 76.68% in Q1:2019.

Overall, Cost-to-Sales at 94.64% as against 92.80% in Q1:2019 compares unfavorably to those of other players like TOTAL (88.96%) and ETERNA (92.71%).

Meristem said: “This is one of the key considerations driving the company’s strategy to increase supply of white products across its retail stations with less reliance on third-party distributors”.

With the increase in operating expenses (OPEX) by 12.22% to ₦2.60 billion, earnings before interest and tax (EBIT) dipped by 80.54% to ₦0.74 billion compare to ₦3.78 billion in Q1:2019.

However, this would translate to 33.50% if adjusted for the ₦2.67 billion realized from discontinued operations which boosted EBIT in Q1:2019.

Down the line, Ardova’s net finance costs fell by 76.15% to ₦0.16 billion from ₦0.65 billion in Q1:2019.

So, pre-tax earnings and net income consequently settled at ₦0.58 billion and ₦0.50 billion respectively.

Net Margin Drags Return on Equity

On a standalone basis, ARDOVA’s return on equity (ROE) in Q1:2020 was 2.99%, compared to 20.57% in Q1:2019.

Analysts said it is worth restating that the exaggerated fall in ROE was due to the higher net margin from discontinued operations a year ago.

Despite higher Leverage (3.39x) and stable asset turnover (0.92x), the 0.96% (from 7.81% in Q1:2019) dip in net margin was the main drag to the return on equity.

For financial year 2020, analysts said they expect earnings per share (EPS) to come at ₦2.68, and with a target price earnings of 6.88x.

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“This implies an upside potential of 56.94% to the current share price of ₦11.75. We therefore recommend as BUY”, Meristem stated.

“Although we are concerned about ARDOVA’s direct cost-to-sales, the company is positioned to boost supply of white products across its 450 retail stations”, analysts stated.


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