OANDO PLC. Oando PLC: to be or not to be? Investment Summary & Highlight. MorganCapital Research. July 3, 2013

Transcription

1 African Frontier Market leading the Global Investment Path to Africa TM Chuks Anyanwu Stock Rating HOLD Industry View In-Line July 3, 2013 OANDO PLC EQUITY NIGERIA OIL & GAS Investment Summary & Highlight Oando PLC: to be or not to be? `Q1-2013: Topline and Bottom-line decline by 23.7% and 19% respectively YoY. Oando PLC ( Oando or the Company ) on Thursday 27 th June 2013 released its unaudited Q result. The company failed to sustain the growth trend recorded in FY 2012 as total revenue declined by 23.7% to N121.06B ($756.62M) from N158.60B ($991.25M) YoY, while net income also declined by 19.1% to N2.45B ($15.31M) from N3.02B ($18.87M) over the same period. However, there were improvements in the Company s profitability margins as gross margin improved to 10.8% from 9.5% YoY, while operating margin also rose to 4.8% from 4.2% over the same period. We think the contribution from the higher margin upstream business was responsible for the improved profitability margins despite actual decline in absolute values. Oando s short-term borrowings rose by 22% to N255.53B ($1.41B) from N208.87B ($1.30B) between FY 2012 and Q and the debt to equity settled at 2.74X in Q1-2013, a level it also maintained in FY The rising short term borrowings of the Company may have been triggered by the delay in subsidy repayment by the Federal Government which has necessitated the dependence of the company on borrowings from local banks to fund importation of petroleum product for its downstream oil marketing business, this assertion is supported by the company s huge trade receivables which settled at N255.03B ($1.59B) as at Q However we think that some of the Company s long term borrowings which has fallen due also contributed to the spike in short term borrowing. The Company has invested hugely in the upstream sector of the Nigerian oil and gas industry by acquiring onshore assets from bigger oil companies who decided to sell off their onshore assets to concentrate on their off shore assets. The Company clearly indicated its intention to expand its upstream business when it executed a reverse takeover of Exile Resources Incorporated of Canada through a newly created Oando Energy Resources. Bloomberg Ticker: OANDO: NL NSE Symbol: OANDO Listed on the Nigerian Stock Exchange Key Ratios & Statistics Current Stock Price: N13.03 Fair Value: N12.96 Outlook: NEUTRAL Market Capitalization: $555.56M Year End: December Price-to-Earnings (PE) 2012Trailing: 8.24X 2013 Forecast: 8.04X Earnings-per-Share (EPS) Current: (FY 2012): N Forecast: N1.62 Dividend-per-Share: 75K Return-on-Equity: 10.24% Return-on-Asset: 2.08% Outstanding Shares (m n) 6,822 Free Float: (m n) 5,312 (77.87%) Year-to-Date: 4.11% Latest Result Q Dollar ($) N160 Q a glance N (m n) N (m n) % Q Q Gross Earnings 121, , PBT 4,289 4, PAT 2,448 3, EPS N1.06 N

2 2 Consequently, Oando Energy Resources is currently listed on the Toronto Stock Exchange. This provides a platform for the company to raise equity from the international market to fund its expansions. Oando raised N55.2B ($345M) through a rights issue concluded recently. The Company issued 4.545Billion Shares to its already existing 2.274Billion Shares, bringing its share count to 6.819Billion shares. The Company plans a further dilution of its shares to fund its acquisition of the local unit (Nigerian business) of ConocoPhillips for $1.8Billion. After paying cash deposit of $435 million, Oando plans to raise the balance of $1.36 billion through private placements, a share sale and $800 million loan from local and international lenders. The acquisition of ConocoPhillips onshore assets builds in an added 43,000BPD capacity into the already existing 4,800BPD capacity of Oando; 213 million barrels of oil-equivalent in proved and probable reserves, and a 17 percent equity stake in the proposed Brass liquefied natural gas project SALES & PBT GROWTH 26% -1% 13% 8 51% 18% 47% 35% Revenue -1% 13% 51% 18% PBT 26% 8 47% 35% Revenue PBT Valuation shows that Oando is fairly priced. The stock is currently trading at a slight 0.54% premium to our fair value estimate of N12.96, with a 12month investment horizon. Our fair value computation is based on the financial performance expectation for FY We placed a Neutral outlook on the stock purely for non-valuation concerns. Earnings Projection Our FY 2013 Revenue estimate for Oando is N740.50billion ($4.68B) which translates to a 1 improvement relative to FY 2012, while our net income estimate is N11.10billion ($49.98M) and equates to a 3.0 growth relative to FY This yields an EPS of N1.63 and a forward P/E of 7.97X. We think that the Company s expansion drive is laudable and expect a well-diversified indigenous oil company when it concludes its expansion process Revenue 3 YEAR CAGR ( ) 20.9% 50.2% Finance Cost 22.9% Admin Exps PBT -10.2% CAGR On the merits of current performance however, we think the Company is highly leveraged with a debt to equity ratio of over 25 as at FY 2012 and an expectation of further debt acquisition for the purchase of the Nigerian interest of ConocoPhillips, a deal which is expected to be concluded by the H The Company s finance cost rose by 44% to N19.72B ($123.25M) from N13.68B ($85.50M) between FY 2012 and FY 2011 and we consider this quite significant, especially with its impact on bottom-line. The expectation of further dilution of the Company s shares is also a disincentive in the short run as the Company s ability to service its widening shareholder base (dividend payment) maybe significantly impaired given its already bloated cost of fund ROE & ROA 15.5% 10.2% 4.4% 1.8% 0.4% ROE ROA 2.1%

3 3 We expect that security challenges in the country and theft/ damages to some of the newly acquired assets may also result in production stoppages and down times which may affect the company s ability to ramp up production capacity utilization as speedily as expected. Overall we think Oando is gearing up to be one of the most profitable companies in Nigeria, provided it remains focused on its growth path and is efficient with managing its growth. We however retain our Neutral outlook on the sector and maintain our hold recommendation of the Company s stock in the short term 16% 14% 1 8% 6% 4% 2% PROFITABILITY MARGINS 14% 8% 6% 5% 3% 3% 1% GPM OPM PBTM Valuation Analysis Our fair value for Oando shares was calculated using the Dividend Discount Model comprising our expected dividend estimate for the company and a MorganCapital customized tweak to adjust for the risk of investing in the Nigerian oil and gas sector. Our Required Rate of Return (RROR) factors in a risk premium of 7% and the yield for the most recently issued 20-Year FGN Bond was applied as the risk free rate of return. Our projected dividend of 75K for FY 2013 which amounts to a 42.7% dividend payout ratio is based on our earnings estimate for FY Investment Conclusion DEBT-EQUITY 410.5% 303.3% 274.2% 222.1% 158.4% A fairly valued stock based on our research, with focus on our FY 2013 estimates. We think the company s growth plans are commendable, but we are worried it may be growing too fast and spreading the Company too thin. We are also worried about the Company s debt exposure and its cost on profitability in the short term. The impending change in the Company s shareholding structure, resulting from the potential share dilution to fund the ConocoPhillips Asset acquisition; the risk of not meeting production (cash flow) targets as a result of down times triggered by unrest in the Niger Delta; the possibility of a steep decline in oil prices; coupled with the high exposure of the Company to debt, culminate in our Neutral outlook for Oando shares in the short term. We think that expanding into new a territory with high leverage calls for serious caution. We will reassess our Medium & Long term outlook for the stock as new information becomes available.

4 4 Investment Risks To our Fair value (on the upside) Better than expected contribution of the Up-stream business to total revenue: The upstream business has higher margins compared to the downstream sector. If the sector contributes more than our expectation to Oando s group earnings, then the Company may outperform our sales expectation. Cost Efficiency: Our assumption is that the Company s profit margins will tighten as a result of slower sales growth and higher finance cost on account of the Company s rising debt profile and this was factored into arriving at our net income estimate. If however the company s margins hold firm, then the company may outperform our net income expectation.. MARKET CAPITALIZATION (N'm) ($) (F) 1, REVENUE (N'm) 378, , , ,499 PROFIT B/F TAX 24,318 12,965 17,554 18,512 TAX 9,943 11,252 6,767 7,405 PROFIT AFTER TAX 14,374 1,712 10,786 11,107 EARNINGS PER SHARE (EPS) PRICE-EARNINGS RATIO TOTAL ASSETS 324, , , ,356 TOTAL DEBT 147, , , ,885 DEBT-EQUITY % % % SHARE CAPITAL 15,698 15,698 15,698 15,698 OUSTANDING SHARES (M'n) 2,274 2,274 6,822 6,822 OWNERS' EQUITY 93,049 92, , ,887 CASH DIVIDEND N3.00 NIL 75k 75K SCRIP DIVIDEND 1 FOR 4 NIL NIL RELEASE DATE 21/03/11 09/03/12 41,611 AGM DATE 15/04/11 03/04/12 24/04/13 CLOSURE DATE 05/04/11 23/03/12 15/04/13 PAYMENT DATE 15/04/11 05/04/12 24/04/13 MorganCapital Securities Ltd The Pent Floor 3, Biaduo Street, Off Keffi Street, S/West Ikoyi. P.O.Box Victoria Island, Lagos ,

5 5 DISCLOSURE Analyst Certification Where applicable, the views expressed in this report accurately reflect the analysts' views about any and all of the investments or issuers to which the report relates, and no part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations, views or corporate finance transactions expressed in the report. Conflict of Interest MorganCapital Securities Ltd and its sister companies within the MorganCapital Group may execute transactions in securities of companies mentioned in this document and may also perform or seek to perform investment banking services for those companies mentioned herein. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and report(s). Disclaimer The contents of this report are obtained from publicly available sources and in good faith but no representation or warranty, either express or implied, are made to its accuracy or completeness. This report is not an offer to buy or sell or a solicitation to buy or sell securities, where mentioned. This report is distributed (through s) in the United States, Europe, Asia and Africa by MorganCapital Securities Limited and its Sister Companies within the MorganCapital Group all operating in Lagos, for general circulation only. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to specific clients. The financial instruments discussed in this report may not be suitable for all investors thus investors must make their own investment decisions based upon their specific financial situations, investment horizons and investment objectives. If a financial instrument is denominated in a currency other than an investor's currency, a change in exchange rates may adversely affect the price or value of, or the income derived from, the financial instrument, such an investor effectively assumes currency risk. In addition, income from an investment may fluctuate and the price or value of financial instruments described in this report, either directly or indirectly, may rise or fall. Furthermore, past performance is not necessarily indicative of future results. MorganCapital Securities Limited and its sister companies within the MorganCapital group are not licensed to distribute research reports in the US, Europe, Asia or other African countries thus this document must not be acted on or relied upon by persons who are not Relevant Persons, as defined in the paragraph below. Any investment or investment activity to which this document relates is only available to Relevant Persons and will be engaged in only with relevant persons. Relevant Persons are persons who are clients or staff employed by MorganCapital Securities Limited or its sister companies within the MorganCapital Group.