Conoil Plc: A good, not an excellent year

Introduction

While our analysis of Conoil’s recent financial reports shows that it was yet able to turn a profit, we also believe that Nigeria’s economic recession continues to have a slow-down effect on the company. For the 2017 review year, the company while able to hold its own against economic elements turned out a profit, but the profit was a little lower than that which it recorded in the prior year; this despite the fact that it earned more revenue through sales during the course of the year.

The company however continues to pay shareholders dividend, paying them N2 per share for every share held for the 2017 financial year. This one action may very well be the action that continues to ensure investor confidence in the management of the company.

Core operations

The company earned more revenue in 2017 than it did in 2016. Revenue for the year was N115.5 billion, 35.9 per cent more than the N85.0 billion recorded in 2016. This is as compared to a growth rate of 2.5 per cent in the prior year. It is important to note that the company had expended significantly more on cost of sales and operations to achieve the level of sales that it did. Finance costs had also increased over that of the prior year.

These increased finance costs and cost of sales ate significantly into the company’s pre and after tax profits, driving them below the levels that they were in in 2016. Profit before tax was N2.3 billion, 46.5 per cent worse than the pre tax profit of N4.3 billion recorded in 2016. It also recorded a 43.5 per cent decline in after tax profit during the course of the year, with the after tax profit declining to a level of N1.6 billion from a higher profit position of N2.8 billion in the prior year.

Thus, earnings per share (EPS) was lower than that of the prior year. EPS for the year was 227 kobo, much lower than the 405 kobo EPS recorded in the prior year. Thus, dividend per share (DPS), at 200 kobo was also lower than the 310 kobo per share that the oil company dedicated to dividend payout in 2016.

Profitability ratios

The company did not perform as well in 2017 than it did in 2016 in terms of return on assets (ROA) and return on equity (ROE), recording lower returns in both ratios than it did before. Return on assets for the period under review was 3.7 per cent while return on equity was 8.9 per cent, both worse than the return ratios of 6.2 per cent 15.3 per cent respectively in the preceding year. Analysis shows that the company made a pretax profit of N3.70 on all N100 assets deployed and an after tax profit of N8.90 on every N100 worth of equity employed. While these were not of themselves bad results, they do not signify an improving management of key assets.

The company’s ability to squeeze as much profit as is possible from revenue earned also declined during the course of the year. Profit margin declined to a mere two per cent in 2017 from a higher 5.1 per cent in the erstwhile year.

The company’s total number of employees decreased to 175 from 189 in the preceding year. Earnings per employee then improved to N660 million on the average, up from N450 million in 2016.

Other ratios

For the 2017 financial year, Conoil’s equity could finance just about the same proportion of its total capital as it could in the preceding year, and this means that the company’s capital adequacy is still as robust as that of the prior year. The result for the year was 95.1 per cent, still in the vicinity of the 95.4 per cent recorded in the erstwhile year. The result recorded also remained above par with what was obtainable in the industry for the period under review.

Conoil also performed as well in 2017 as it did in 2016 in terms of liquidity ratios. It was still as able to convert assets into needed funds as quickly as it did in 2016. Current ratio, which measures whether or not a firm has enough resources to pay its debts over the next 12 months, was 1.3 times, same as the preceding year’s 1.3 times result, and also higher than what was generally obtainable in the industry.

Having a debt to equity ratio of 2.51 indicates that the company is using N2.51 of liabilities in addition to each N1.00 of stockholders equity. In other words, the company is using a total capital of N3.51 for every N1.00 of equity capital. This is a little lower than what the company deployed in 2016.

Sustainable growth

For the review year, the company recorded an after tax profit of N1.58 billion, and retained only 12 per cent of it. With a profit margin of two per cent, a retention ratio of 0.12 times, an asset turnover of 1.84 times and an asset to equity ratio of 3.51, the company had a sustainable growth rate of 1.55 per cent. This means that using only the resources it generated, the company had a 1.55 per cent inherent capacity for growth during the course of the year. It however grew faster, recording a growth rate of 35.9 per cent. This scenario is in contrast to the prior year when sustainable growth was 5.6 per cent and actual growth was a lower 2.5 per cent.

Unique strategies

Conoil Plc was formerly known as National Oil and Chemical Marketing Plc) was incorporated in 1960 as a private limited liability company. The Company was converted to a public company on 29 August 1991. In 2000, the Federal Government of Nigeria through the Bureau of Public Enterprises (BPE) bought 40% issued ordinary shares of the Company held by Shell Company of Nigeria (UK) Limited.

Following the privatization of the Company, ConpetroLimited acquired 60% of the issued shares of the Company. As a result of a rights offering by the Company in 2002, ConpetroLimited now holds 74.4%  of the issued capital while members of the Nigerian public hold the remaining 25.6% stake in the Company.

The principal activities of the Company are the marketing of refined petroleum products, manufacturing and marketing of lubricants, household and liquefied petroleum gas for domestic and industrial use.

Stock value

As at June 14 2018, Conoil’s stock traded at N30.40, and our analysis shows that the stock was overvalued at this price.

As at analysis date, the company had a net assets per share (NAPS) value of N25.77, lower than the N30.40 at which it traded on the floor of the stock exchange. Also, the company had a book value of N17.89 billion and a market capitalisation of N21.1 billion, putting its book value/market cap ratio at less than one. Traditionally, a book to market value ratio lower than one indicates an overvalued stock.

The stock is also not at the moment low priced, so it is not easily accessible by all kinds of investors.

Conclusion

We believe that Conoil is still a solid company, but it is at the moment having a little difficulty adjusting to the economic realities of the Nigerian nation, which affected it in the way of rising cost of operations as well as rising finance costs. With time however, we believe it will be able to return to maximum profitability.

*Source: Conoil’s 2017 financial report

*The Nigerian Stock Exchange