Oando: Profit hopes hang on tax credit

Oando’s hopes for profit improvement in its 2018 operations hang largely on how much tax credit the company could get at full year. Tax credit produced more than one-half of its after tax profit at the end of the third quarter operations in September 2018.

There was however a sharp swing from a tax credit of N13 billion in the second quarter to a tax expense of over N5 billion in the third quarter. That slashed its net tax credit of N10.8 billion at the end of June by nearly one-half, which slowed down profit growth significantly.

In the event of another tax expense in the final quarter, the company’s full year profit could drop well below the third quarter figure. That leaves the company’s profit expectation for the 2018 financial year dicey.

A major fundamental improvement at the end of the third quarter is a shift from a pre-tax loss of N2.26 billion at the end of half year operations to a pre-tax profit of N4.77 billion. The figure yet represents a loss of half of the profit the company earned in the same period in the preceding year.

The energy company remains on track towards a turnaround for the third year running but the challenge is that the core business is yet to be the driving force. Profit from discontinuing operations provided the steam for the profits reported in 2016 and 2017. Tax credit is expected to be the key function for profit performance in 2018, as the earnings reporting season fast approaches.

Between tax credit and profit from discontinued operations, Oando continued getting ahead on the path of rebuilding the bottom line up to the end of the third quarter. The chance that further growth of tax expense could derail the turnaround journey in the final quarter is the risk on Oando.

The company continues to do well on sales revenue, which grew by 32% year-on-year to N505 billion at the end of September 2018. This is an accelerated growth from 11% at half year and 9% increase in the 2017 full year.

The strong growth in revenue is driven by increased commodity prices, according to the company’s report. It realized an average crude oil price $71.42 per barrel at the end of the third quarter, a record increase of 45% year-on-year. The average gas price also grew by 31% to $1.76/mcf.

Based on the accelerated growth rate, the company’s turnover estimate is revised upward from N600 billion to N715 for the 2018 full year. There was only a slight increase in production but the big gains in prices made all the difference for the company during the period.

Cost of sales changed direction from a moderated growth at the end of half year and grew ahead of sales revenue at 37% to N427.54 billion. That permitted an increase of less than 9% in gross profit to N77.55 billion, a sharp slowdown from 52.6% advance at the end of June. Gross profit margin declined from 18.6% in the same period in 2017and from 17.2% in the second quarter to 15.3% at the end of September 2018.

A big disappointment continues to come from other operating income, which dropped by 87.5% to N2.15 billion over the review period. The effect of that was a drop of 25% in operating profit to N28.66 billion at the end of September.

Some moderation came from administrative cost, which slowed down from 24% increase at half year to a flat growth at the end of the third quarter. Despite a moderate decline of 4.5% in finance expenses, the figure stood well above the operating profit figure at N31.2 billion.

A remedy came from finance income of N7.6 billion, which reduced net finance cost by 7% and left N4.77 billion as pre-tax profit. That was still a drop of 50% from a pre-tax profit of N9.50 billion in the same period in 2017.

Balance sheet debts were slightly down at N227 billion at the end of the third quarter. This is a sustaining reduction since 2014 though finance expenses may remain large for now.

A net tax credit of N5.62 billion provided the strength for the improved profit performance at the end of the third quarter. What will happen to this figure – whether it will go up or down in the final quarter will determine Oando’s bottom line position for the 2018 operations.

The company earned 32 kobo per share at the end of September 2018 compared to 9 kobo per share in the same period in 2017. Oando is still on a retained loss position, which stood at close to N137 billion at the end of the third quarter. Cash dividend payment isn’t expected as long as the retained loss remains in the books.