Oando Plc: A worse year than most

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Introduction

Oando Plc did not have a good year in terms of profit retention. Even though it made more sales in 2016 than it did in 2015, its cost of sales and administrative expenses went through the roof. It was therefore not able to sustain the momentum of sales growth to the profit level. It recorded a pretax loss, but an after tax profit of N3.5 billion (due to profit from discontinued operations). Profitability ratios were therefore mostly negative, and shareholders did not receive a dividend.

We cannot yet predict what the company’s 2017 financial year will be like in terms of profitability.

 

Core operations

For its 2016 financial year, Oando performed commendably well in terms of turnover growth but not particularly well in terms of profit retention.  Turnover for the year grew was an all-time high N455.7 billion, a whopping 124 per cent increase over the preceding year’s N203.4 billion result. This was despite Nigeria’s official recession during that period. It seems that while Nigerian consumers had a reduced purchasing power, Oando produces one of the necessities that the reduced purchasing power could not and did not affect.

The company’s cost of sales however ballooned out of control, growing to as much as N426 billion from a mere N157 billion in the prior year. This ate into gross profit substantially, and as the company couldn’t also effectively curtail operational and administrative expenses, it recorded a pre-tax loss rather than a profit.

It took profit from Oando’s discontinued operations for it to post a profit for the year. Even then, after tax profit was only N3.5 billion. This N3.5 billion result is however commendable in the light of the fact that the company had recorded an after tax loss of N49.7 billion in 2015. So the N3.5 billion was actually a welcome development.

Because of an after tax profit rather than a loss, earnings per share was predictably better than that of 2015. Earnings per share was 26 kobo, as compared to a loss per share of N4.22 before. Shareholders did not receive any dividend for the year.

 

Profitability ratios

While the company’s ability to generate revenue improve, its ability to retain whatever revenue it earned worsened. Because of a pretax loss, most of its profitability ratios were in the negative. For the year, it recorded a negative profit margin of 7.2 per cent. While in itself bad, the loss margin was better than the loss margin of 25.1 per cent in the erstwhile year. Analysis shows that for every N100 earned by the company in the course of the year, it recorded a loss of N7.20, as compared to a loss of N25.10 in the preceding year.

Assets deployed also fetched a loss in 2016. Loss on assets for the year stood at 3.3 per cent in 2016, as compared to a loss on assets of 5.4 per cent in 2015.

For the 2016 financial year, Oando deployed equity valued at N192.3 billion and for every N100 equity deployed, the company made an after-tax profit of N1.80, a commendable improvement on the loss of N97.60 made in 2015.

The company employed fewer employees during the course of the year and its employee number decreased to 90 from 94. Earnings per employee then improved to N2.4 billion on the average, up from N426.4 million in 2015.

 

Other ratios

Oando’ shareholders’ funds could finance 30.6 per cent of its total capital for its 2016 financial year. While this was higher than the 16.6 per cent recorded in 2015, it still fell below 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. Oando was one of the exceptions, having a not so adequate current ratio of 0.3 times.

Having a debt to equity ratio of 4.16 shows that the company is using N4.16 of liabilities in addition to each N1.00 of stockholders equity. In other words, the company is using N5.16 of total capital for every N1.00 of equity capital. This was a little lower than what was normal in the industry for 2016, and much lower than Oando’s position in 2015.

 

Sustainable growth

For the review year, the company recorded a profit of N3.5 billion, but did not pay shareholders any dividend, just like in the prior year. As previously mentioned, loss margin for the year was 7.2 per cent, better than a loss margin of 25.1 per cent in 2014.

With a higher asset turnover, the company recorded a sustainable growth rate of negative 17.1 per cent, meaning that it had no inherent capacity to grow using the resources it generated during the course of the year. It however actually grew by a very high 124.0 cent. This was also the scenario in 2015. If the company continues like this, it may run into serious financing problems in the coming years.

 

Stock value

On April 28 2017, the market price of Oando was N5.78, and this is currently one of the stocks that fall within the median range on the Nigerian Stock Exchange (NSE). Analysis shows the stock is currently undervalued at that price. Net assets per share was N15.98, almost thrice 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 lower market value as compared to its book value. While book value is N192.3 billion, current market capitalisation is a much lower N69.5 billion. This also, is a sign of undervaluation.

Not only is this stock undervalued, it might also be easy for new investors to take advantage of this while hoping for capital appreciation because it is closer to a penny stock and mid-level investors can purchase a large volume at once.

For those able to, we recommend a buy, but only with a caveat. The company is going through some tough times right now, and it may be a while before it returns to full profitability. Investors who buy into the company now may have to wait awhile before they start to receive dividend  from their investments.

 

Unique strategies

The principal activity of Oando is to have strategic investments in energy companies. It is involved in exploration and production, the supply and distribution of petroleum products, and pipeline construction and distribution of natural gas to industrial customers. It is also involved in the provision of energy services to upstream companies.

 

 

Conclusion

While investors may not expect a dividend from their holdings come year end 2017, they will do well to hold on to their investments in hopes of further capital gains and appreciation years down the line.

*Source: Oando’s 2016 financial report

*The Nigerian Stock Exchange

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