Total Nigeria has been on a profit recovery trend for the past two years but whether the oil marketer will be able to maintain the trend this year is in question. Profit improvement decelerated in 2013 and a decline looks likely for the company based on the first quarter performance.
Despite two years of recovery, the company’s profit remains below the 2011 peak record of N5.44 billion. A sustained recovery could have established a new profit high for the company this year but a profit decline in the first quarter mayto follow the company to full year if the growth rate fails to accelerate in the course of the year.
Mr. A. Vovk, the managing director/chief executive officer of the company has been defending profit margin in the past three years at about 2.2% but this time whatever strategy that worked for him in the past seems to be failing. Profit margin has declined from 2.2% at the end of 2013 to 1.8% in the first quarter. This reflects the company’s inability to grow sales revenue as well as reduce costs sufficiently.
Sales revenue declined slightly in the first quarter at N60.59billion for the company from the corresponding figure in 2013. Based on the first quarter growth rate, turnover is projected at N245 billion for Total Nigeria in 2014. This will be a marginal improvement of 2.9% over the company’s sales revenue figure of N238.16 billion at the end of 2013.
The indication is that revenue slow down is expected to continue for the company this year. Revenue growth had decelerated from 25.3% in 2012 to 9.3% in 2013 and a further slow down is anticipated at current growth rate. The company has maintained a continuing growth in revenue over the past three years after a drop in 2010.
Against a slight decline in sales revenue, net profit declined at a faster pace for Total Nigeria at the end of the first quarter. Net profit amounted to N1.07 billion for the company during the period, which is a decline of 6.6% over the corresponding figure in the preceding year. Based on the first quarter growth rate, net profit is projected at N4.75 billion for Total Nigeria at the end of 2014. This will be a decline of 11% from the net profit figure of N5.33 billion the company posted in 2013.
The company has been rebuilding its profit in the past two years after a major drop in 2011. The recovery process may therefore be interrupted this year and the possibility of attaining a new profit high in 2014 is significantly reduced by the first quarter performance.
Loss of profit margin has happened to other oil marketers in the first quarter. Mobil Oil Nigeria saw a sharp drop in net profit margin from 4.4% at the end of last year to 1.7% in the first quarter. Forte Oil, which is leading the oil marketinggroup this year on profit margin, recorded a decline in net profit margin from 3.9% in the 2013 full year to 3.2% in the first quarter. MRS has managed to defend its already tiny profit margin at 0.7% over the same period.
Profit margin is constrained for Total Nigeria from both angles of costs and revenue. While earnings declined, costs claimed increased shares of turnover. Cost of sales increased by 3.7% to N53.5 billion year-on-year against the 0.7% decline in sales revenue. That caused a more rapid decline of 8.0% in gross profit, which amounted to N7.10 billion in the first quarter.Gross profit margin therefore declined from 12.6% in the first quarter of last year to 11.7% in the current year.
Other operating income went down by 23.3% to N83.7 million, which added to the pressure on the bottom line. Further pressure on the bottom line came from other gains and losses, which changed from a gain of N10 million in the corresponding quarter last year into a loss of N109 million this year.
Some favourable developments on the income and expenditure statement of the company include a leap of about 263% in interest income to N127 million against a drop of about 20% in interest expenses. Distribution cost also moderated relative to revenue with a decline of 13.8% and so did administrative expenses, which declined by 5.6% during the review period.
The drop in interest expenses reflects a reduction in the company’s borrowings in the first quarter. Short-term borrowings are down by about 22% to N13 billion from the closing figure last year. The increase in interest income is however against a sharp fall of almost 41% in cash and bank balances at N5.58 billion over the same period.
Other major balance sheet developments in the first quarterinclude a rise of 53.2% in inventories to N22.4 billion, an increase of 7.6% in trade and other receivables to N33.47 billion and an increase of 17.1% in trade and other payables to about N51 billion. These changes resulted in a major cash flow difficulty for the company in the first quarter.
A net cash of about N151 million was used by operating activities in the first quarter, which had to be financed with a net cash generation of N512 million from investing activities.With a net cash of N477 million used in financing activities, the company closed the first quarter with a net cash decrease of over N115 million, up on the opening cash deficit of N7.16 billion.
The company earned N3.15 per share at the end of the first quarter, down from N3.37 per share in the corresponding period last year. Earnings per share is projected at N13.97 for Total Nigeria at the end of 2014. This will be a decline from the earnings per share of N15.68 the company recorded in 2013. Its peak earnings per share remains the N16 the company earned in 2011.
For Total Nigeria to keep profit growing for the third year running this year and at least match its peak profit figure of N5.44 billion, profit growth needs to accelerate in subsequent interims. Vovk will have to post a minimum of N1.46 billionin net profit in each of the remaining three quarters of the yearagainst the N1.07 billion recorded in the first quarter.