Introduction
As can be determined by our analysis of its audited reports, the 2016 financial year was a commendable one for the company. It was able to step up the level of its business activities, earned a better revenue and retained better profit in the review year than in the prior year. Also, profitability ratios for the year were mostly a progression over the preceding year’s. It is however important to note that while the company’s results were better than those of the prior year, they could not compete against the industry standards for 2016. In this regards, the company underperformed many of its peers. While we label the 2016 financial year for Eterna as an excellent year, it still needs to work more on bringing up its profitability ratios.
We predict that the 2017 financial year will be a crucial one for the company, and determine if it is a top oil company in the country or not; and if its stock is an excellent investment vehicle for shareholders or not.
Core operations
Eterna Oil had a relatively good year in 2016 operation-wise. First to experience an increase was the company’s gross earnings. Gross earnings for the year stood at N106.9 billion, and this was about 16.1 per cent higher than the N92.1 billion recorded in the preceding year. This 16.1 per cent growth rate is as compared to a growth of rate of 14.9 per cent in 2015.
Because direct costs grew more slowly than the rate at which turnover did, gross profit appreciated commendably, growing by 177.4 per cent to N98.3 billion. After deducting operating expenses from the gross profit, Eterna was left with a pre-tax profit of N2.4 billion, 84.6 per cent higher than the N1.3 billion pre-tax profit recorded in the erstwhile year. This 84.6 per cent growth rate is also as compared to a pre-tax profit decline rate of 26.8 per cent in the preceding year.
After-tax profit also grew over the preceding year’s by 15.6 per cent, closing at N1.48 billion, while distributable profit was the same N1.48 billion. Dividend was N390 million, 19.9 per cent better than the N330 million dedicated to dividend in 2015.
Earnings per share, was predictably higher than that of the prior year. At N1.13, the EPS was 15.3 per cent higher than the 98 kobo recorded before. The company then declared a dividend of 30 kobo, higher than the 25 kobo declared in 2015.
Profitability ratios
There was a commendable progression in the company’s profitability ratios for 2016. Profit margin for 2016 stood at 2.2 per cent, up from 1.4 per cent in the preceding year. What this means is that a higher N2.20 was able to make it to the profit position for every N100 earned in 2016, up from N1.40 in 2015.
Return on assets (ROA) followed a similar pattern. ROA for the year improved to 7.6 per cent from 4.6 per cent in 2015, meaning that every N100 worth of assets deployed contributed N7.60 to the pre-tax profit for the year, higher than the N4.60 recorded in 2015.
Also, return on equity (ROE) grew to 13.7 per cent from 13.2 per cent, meaning that every N100 worth of equity employed contributed N13.70 to the after-tax profit in 2016, up from N13.20 in the prior year.
The company’s total number of employees stayed at 55, same as it was in 2015, and Earnings per employee then improved to N1.94 billion on the average, up from N1.67 billion in 2015. This is indicative of employee productivity and company efficiency.
It is however important to note that while Eterna’s results were better in 2016 than they were in 2015, the results are still a little low. The company needs to continue to work to bring them up to industry standards.
Other ratios
Eterna Oil’ shareholders’ funds could finance 80.8 per cent of its total capital for its 2016 financial year. While this was lower than the 89.7 per cent recorded in 2015, it still fell within the range of the industry standard for the period under review.
A common feature of the manufacturing industry for the 2016 financial year is that most companies had high current ratios, having the ability to meet short term liabilities with short term assets. Eterna Oil was followed the rule with a current ratio of 1.4 times, higher than 1.2 times in the erstwhile year.
Having a debt to equity ratio of 1.92 shows that the company is using N1.92 of liabilities in addition to each N1.00 of stockholders equity. In other words, the company is using N2.92 of total capital for every N1.00 of equity capital. This was a little lower than what was obtainable in the industry for 2016.
Sustainable growth
For the review year, the company recorded a distributable profit of N1.48 billion, and chose to pay shareholders a slightly higher level of dividend than it did in the prior year. Because of this, it retained a proportionally lower proportion of its profit. Retention ratio was 0.73, infinitesimally lower than 0.74 in 2015.
Meanwhile, profit margin for the year was 2.2 per cent, up from 1.4 per cent before. This means that the company was able to get a profit of N2.20 from every N100 sales made in 2016, as compared to N1.40 in the prior year.
The company recorded a sustainable growth rate of 15.6 per cent in 2016, meaning that it had the capacity to grow by 15.6 per cent using on the resources it generated. It grew by a slightly higher 16.1 per cent. This means that the company slightly overshot its inherent potential for growth during the review year.
Stock value
The current market price of Eterna is N3.80 (as at July 28, 2017), and this is currently one of the lower priced petroleum stocks on the Nigerian Stock Exchange (NSE). Analysis shows the stock is currently undervalued at that price. The company had an earnings per share of N1.13 at the close of its financial year and dedicated 30 kobo of that to shareholders in lieu of dividend.
As at analysis date, net assets per share was N8.31, and this was more than twice of the current market price and therefore suggesting that the stock is undervalued.
The company is also worth much more in reality than it is selling for on the NSE at now, as shown by a much higher book value as compared to its market value. While book value is N10.83 billion, current market capitalisation is only N4.98 billion, and is only about a half of the book value. This also, is a sign of undervaluation.
Not only is this stock undervalued, it is also easy for new investors to buy into the company because it is a relatively cheap stock.
Unique strategies
Eterna Plc was incorporated in 1989 as Eterna Oil and Gas Limited. The Company commenced business in 1991 and became listed on the Nigerian Stock Exchange in 1998. In the bid to carve a niche as a manufacturer and marketer of high quality lubricants and oil products, Eterna Plc established a technical partnership with Castrol BP in 1991, the pioneers in global lubricant technology and specialty chemicals.
This relationship gave rise to a distributorship agreement and an exclusive right to import and market Castrol products in Nigeria.
Today, Eterna’s lubricant manufacturing plant located in Sagamu is one of three accredited Castrol blending plants in Africa and the only one in West Africa. Eterna also owns a coastal tank farm in Lagos with a capacity of 30 million litres; as well as an aviation fuel depot with a capacity of 2.8 million litres.
Conclusion
Our examination of Eterna’s results shows that while it is possible for a company to improve on its performances, it is also possible to do so very slowly. Eterna is a prime example of this fact, and will need to work hard in the coming financial year to even surpass its 2016 results and thus compete favourably against its competitors.
*Source: Eterna Oil’s 2016 financial report
*The Nigerian Stock Exchange