Oando’s profit slows down in Q3 on surging cost of funds

Oando’s third quarter report shows it could not maintain the profit growth rate seen in the second quarter and the full year profit outlook has moderated significantly. Rising interest and administrative expenses have eroded margins and undermined profit growth. Despite an accelerated growth in sales revenue in the third quarter, the company still continues to lose revenue on year-on-year basis. It remains on track however in improving profit performance after a crash of 87% last year.

The petroleum company that has launched into upstream operations isn’t getting anywhere close to its turnover peak in 2012 but looks good to attain a new peak in profit at the end of 2014. It is therefore working a major turnaround to lift profit from the lowest record in 2013 to a new peak in 2014.

The company’s group chief executive officer, Wale Tinubu, has succeeded in increasing Oando’s scale of upstream operations with the acquisition of ConocoPhilips’ Nigerian business. At the end of the second quarter, he promised to show more robust financials in the second half, which has begun to come. Turnover has accelerated from the second quarter figure, after tax profit has advanced more than 75% year-on-year and asset base is nearly double the closing figure in 2013. He has however lost profit margin from the second quarter position.

Growing profit against declining sales revenue is Oando’s winning strategy for this year. This means big cost savings have been retained and profit margin improved on year-on-year basis. The company closed its third quarter operations with a turnover of N338.11 billion, which is a drop of 12.5% from the corresponding period last year and yet a growth of nearly 74% over the second quarter figure.

Full year outlook indicates a turnover in the region of N454 billion for Oando in 2014. This will be an increase of 9.2% from the turnover figure of N449.87 billion the company posted in 2013. Sales revenue had dropped by 30.8% last year. The company has not recorded a stable growth in turnover in the past five years and is operating well below its revenue peak of N650.56 billion it reported in 2011.

Oando earned an after tax profit of N10.70 billion at the end of the third quarter, which is a growth of 75.6% year-on-year. This is already more than seven and half times the full year net profit of about N1.40 billion it posted at the end of 2013. Profit growth rate has however slowed down considerably from almost N9 billion the company earned at the end of the second quarter.

Based on the current growth rate, full year net profit is projected at N14.70 billion for Oando in 2014. This will be a new peak in earnings for the company, slightly ahead of the current peak of N14.37 billion in 2011. This will be an outstanding recovery/growth of 950% in profit for the company – one of the strongest profit advances expected this year among listed companies.

Profit dropped for the second year in 2013 from the 2011 peak. With the expanded operations, the company needs to establish a track record of stable growth in sales revenue and profit.

The strength to grow profit from a decline in sales revenue is built around two major cost savings achieved. Cost of sales dropped by almost 24% to N258.51 billion year-on-year at the end of September against a decline of 12.5% in turnover. This means the company paid a reduced cost to generate a unit of sales compared with the preceding year. Consequently, gross profit rose by 70.4% to N79.60 billion over the review period, lifting gross profit margin from 12.1% to 23.5% over the same period.

The second area of cost saving is selling/marketing cost, which declined ahead of turnover at 18.5% to about N4.24 billion. Administrative cost however rose by almost 80% to N47.9 billion to claim 14.2% of sales revenue against only 6.9% over the period. Other operating income surged up by 150% to N8.79 billion and contributed significantly to the near doubling of operating profit at N36.25 billion during the period.

Rising interest expenses tempered the high growth in operating profit significantly. Net interest expenses tripled at N26.14 billion at the end of the third quarter. The company’s balance sheet debts have increased over the closing figures last year. Short-term borrowings have risen by 11% to N203.40 billion and long-term debts have more than tripled to N148.32 billion. Huge investments in the acquisition of subsidiary compelled the company into new borrowings, as proceeds from fresh rights issue contributed less than 17% of the investing needs as at the end of September.

The company earned N1.26 per share at the end of the third quarter, increasing from 93 kobo in the same period last year. Earnings per share is projected at N1.68 for Oando at full year, which will be a rebound from 23 kobo per share in 2013. The company is paying an interim dividend of 70 kobo per share to shareholders on its register as at 17^th November and payment is scheduled for 15th December 2014.