High cost margin, finance charges dampen Total’s Q3 performance

Huge cost margin, combined with spiralling finance charges peculiar to firms operating in the downstream oil and gas industry, has dampened Total Nigeria plc’s third quarter (Q3) performance, analysis of the company’s financial statement shows.

For the first nine months through September 2014, the company’s net income fell by 19 percent to N2.64 billion from N3.26 billion the same period of the corresponding year (Q3) 2013, while sales increased slightly by 2 percent to N177.80 billion.

Analysts attribute the dwindling performance of the company to high cost margins and recurring finance charges in its capital structuring, which has been weighing down on profit.

Total’s cost of sales margins increased to 88.83 percent in Q3 2014, from 86.83 percent the preceding year, while cost of sales jumped by 4 percent to N157.06 billion.

Finance charges were up by 27 percent to N1.84 billion in Q3 2014, as against N1.45 billion last year, which could be attributed to debt incurred on expansion or acquisition of new assets or monies owned to bank to finance the importation of crude.

Companies in the downstream oil and gas industry have been indebted to banks due to the delay in subsidy payments on the importation of refined petroleum products into the country.

Although some subsidy money has been paid by the Ministry of Finance, some analysts believe the recent recurrent dwindling in oil price at the international level which led to depleting government revenue may slow further payments of subsidy arrears.

The spiralling input costs also affected the ability of the company to control direct costs attributed to project, as gross profit margin were down by 9.62 percent to N20.74 billion compared with N22.95 billion the preceding year.

However, with the anticipated subdued decline in crude oil price and the partial deregulation of the downstream sector, analysts are optimistic that the Total Nigeria plc will rebound to the path of growth.

“We believe subdued global crude oil prices which have declined by –38 percent ytd are likely to offset the negative effects of the recent devaluation of the naira,’’ said Uwadiae Osadiaye, an equity research analyst with FBN Capital, a research firm, in an emailed statement.

“Going forward, we expect a combination of a partial/full deregulation of the downstream sector and relatively cheaper products to drive sales volumes in 2015E,” said Osadiaye.

Total Nigeria’s total assets increased by 12.64 percent to N89.40 billion in Q3 2014, from N79.40 billion the preceding year, while fixed asset turnover retuned 198 times, signifying an improvement in the company’s ability to deploy assets in generating sales and profits.

Return on average equity was 36.14 percent in the review period, while return on average assets closed at 5.58 percent.

The company’s share price closed at N157.50 on the floor of the NSE, while market capitalisation was N55.0 billion. “We expect sales to pick-up in Q4, driven by increased intra-state commuting during the festive season. Nonetheless, we forecast a 25 percent y/y decline in 2014E EPS,” said Osadiaye.

 

Source : BusinessDay

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