EPS forecast up 4% over the 2017-19E period; PT cut by 10%
Total’s Q1 2017 PBT of N4.3bn was up 11% y/y and beat our estimate by 14%. Sales were ahead by much more but partially offset by higher costs for imported petroleum products which led to a -371bps y/y contraction in gross margin.
Looking ahead, in our view, compared with 2016, petroleum marketing industry dynamics are likely to be different this year given the central bank’s increased ability and willingness to provide fx.
While this should ordinarily lead to the re-entrance of independent marketers, we suspect that the FG’s N145/litre gasoline price ceiling might limit participation.
On the other hand, margins could improve given that international gasoline prices have declined -14% year-to-date and continue to slide given downward pressures on global crude oil prices.
We expect the impact of the increased fx supply (hence higher product supply) to weigh on H2 2017 in particular. Notwithstanding, we have raised our EPS forecasts over the 2017-19E period by 4%.
Our new price target of N225.0 is lower by 10% because we have raised our risk-free rate by 100bps to 15.5%.
Our price target implies a potential downside of -12% from current levels. Year-to-date, Total shares are down -15%, underperforming the market by -12%. We have retained our Neutral rating on the stock.
The shares are currently trading on a 2017E P/E multiple of 9.6x for EPS decline of -14% in 2018E.
Q1 2017 PAT down -5% y/y due to a higher tax rate
In Q1 2017, sales and PBT grew by 35% y/y and 11% y/y respectively while PAT declined by -5% y/y to N2.7bn.
Although Total’s gross margin contracted by -371bps y/y to 11.2%, this was not enough to offset benefits coming through from the top line growth. Opex came in flattish y/y at N5.2bn.
Total posted an fx revaluation gain of N371m vs. a –N15bn fx-related loss in Q4 2016.
However, PAT declined by -5% y/y because of a relatively higher tax rate of 37.1% compared with 26.5% in the corresponding quarter of 2016.
Sequentially, the trend was similar as sales and PBT both grew 14% q/q and 27% q/q respectively, while PAT declined by -16% q/q.
Compared with our estimates, while sales were ahead by 26%, PAT beat by only 5% due to negative surprises on the gross margin, finance expense and other income lines partially offsetting a lower-than-expected opex.
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