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Oando: the contradiction of rising profit and falling price - THE CITIZEN

By The Citizen
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Judging by the performance of Oando's stock in recent times, the proponents of fundamental analysis model of equities valuation are wrong. In view of the considerable growth in profit and earnings per share of the company and the sustained fall in share price, the fundamental analysis school may need to return to the classroom. Otherwise the stock market will need to explain to the investing public the basis for reducing the company's share price to just a small fraction of what they paid during the public offer in 2008.

Either that the stock market is unfair to Oando or the company's complicated strategies aren't quite understood by the market. The company falls in between Mobil Oil Nigeria and Larfare Wapco by earnings per share in 2012 [third quarter interims] but ranks with UAC Property on the share price table.

Oando and UAC Property are no equals. The company earned N4.08 per share at the end of the third quarter against UAC Property's 58 kobo per share. In terms of dividend pay-out [last dividend in 2010], the oil giant is at par with Nigerian Breweries but trades at a small fraction of the brewing company's current price in the stock market.

If the price makers in the Nigerian Stock Exchange have been rational, they may have got some information unavailable to the investing public. The price of Oando's stock fell all the way in 2011 and continued the downslide in all of 2012.

A rights issue has to happen at the end of the price fall just while the stock market remains unfertile for fresh issues. It comes at a time when many shareholders, who have lost a lot of value, are discouraged and unwilling to take up their rights in the offer. The indication is that the company's ownership structure could change significantly in the post rights offer operations.

The market has lowered the share price sufficiently for the able investors to easily acquire the rights not taken up. Also in the secondary market, heavy volumes have been sustained on the stock since the share price came to its bottom. This is a strong indication that the ownership of the company is fast changing hands.

The only reason suggested for the collapse of Oando's share price is the drop of 76% in after tax profit in 2011 from the height of N14.37 billion in 2010 to N3.45 billion. The drop is however not considered a sufficient explanation for the free fall in the company's share price.

Non-payment of dividend in 2011 isn't considered a significant factor either. Even companies that recorded out right losses during the same period haven't faired this badly. Neither is there any more explanation for the continued decline in the price of the stock despite the strong recovery in profit performance as per the 2012 interim reports.

At the end of the third quarter in September, Oando posted sales revenue of N487.77 billion - the highest revenue figure in the entire stock market. It is higher than the sales revenues of all the other petroleum marketing companies for the same period put together. It is also already a higher revenue figure than the company has achieved in full year operations any time up to 2010 - when it had a far higher stock market valuation.

Also at the end of the third quarter, the company posted after tax profit of N9.27 billion, already 168.7% above the full year profit figure for 2011. Based on the growth rate in the third quarter, the company's after tax profit is estimated to be in the region of N12.7 billion for the 2012 operations. This will be a higher profit figure than the company has achieved in any year except the peak record in 2010.

Again, at the end of the third quarter, the company's earnings per share improved from N3.86 in the corresponding period in 2011 to N4.08. That is also 151.9% above the full year earnings per share figure of N1.62 in 2011. By net assets valuation at the end of the third quarter, the company is worth N44 per share, an improvement from N40.60 in December 2011.

Net asset value indicates what shareholders will receive if the company sells off all assets and pays off all liabilities. Yet the company's stock is currently selling at about 36.4% of net asset value. That suggests that the stock is no longer good enough for value investors and is perhaps only fit for bottom fishers. Oando is slightly ahead of Nestle Nigeria's net asset value per share at N43.11 at the end 2012, which underscores the distorted pricing of Oando.

In terms of ability to convert revenue into profit, Oando has improved its records from net profit margin of 0.6% in the 2011 full year to 1.9% at the end of the third quarter. It is only slightly below Total Nigeria on net profit margin at 2.2% in the same period.

The key earnings indicators suggest that something is wrong somewhere with the pricing of Oando. It is not certain whether the problem is with the company or with the market. To investors, who have relied on the company's improved earnings outlook in 2012 to buy the company's shares, the market is wrong.

To all the major improvements in the earnings fundamentals of Oando, the stock market seems to have turned a blind eye. The experience is contrary to the normal expectation: as earnings performance improved, the company's share price declined!

While the company's result for 2011 operations is not expected to lead to the massive depreciation in the company's share price, it was nevertheless quite a poor result. Of the 54.8% growth in the company's sales revenue to the all time peak of N586.62 billion, it could not save one kobo of it for shareholders. The reported after tax profit for the year actually represents a small part of incomes from non-core activities [foreign exchange gains, profit from sale of assets, interest incomes, etc.].

There were all-round increases in key cost elements in 2011 just as if there was nobody out there to control costs. Cost of sales increased from 85.7% of turnover in 2010 to 88.3% in 2011. That depressed gross profit margin from 14.3% to 11.7% over the period. Administrative expenses took a high jump from 5.9% of sales revenue to 7.2% during the same period.

Interest charges also advanced by 53.6% to claim more revenues during the year and then N9.62 billion had to be written off in exceptional items, involving mainly the cost of terminating technical and management agreements. All at the same time, effective tax rate advanced from 40.9% in 2010 to 76.9% in 2011.

Without the interest and foreign exchange incomes earned by the side, the taxation of N11.48 billion for the year could have landed the company in a deep loss. The after tax profit of N3.45 billion for the year was just a small portion of the total non-core earnings of N14.99 billion received in the year. Without the extra incomes, the company that achieved the biggest revenue ever in Nigeria's corporate history would have closed with a loss of N11.54 billion in 2011.

Distribution of Oando's Revenue in 2011