MRS Oil: Low profit margin prolonging recovery - THE CITIZEN

MRS Oil is expected to make further progress this year towards returning to its previous profit highs but low profit margin is prolonging the recovery journey. At the peak of its performance in 2010, the company converted 2.5% of its revenue into profit. This year, profit margin is failing to improve from 0.7% with which the company closed last year's operations, the lowest among petroleum marketers.

Mr. Paul Bissohong, the company's managing director/chief executive officer, has a limited space to drive the recovery process this year. His only option is to keep growing sales revenue, which he has been doing in the past two years. The challenge is that revenue growth isn't expected to be that strong and therefore cannot provide the momentum that Bissohong needs to achieve full recovery and resume growth.

Sales revenue improved marginally by 2.4% to N47.16 billion year-on-year at the end of the second quarter. Revenue growth is weakened by a decline of 4.4% in the sales of premium motor spirit, which accounts for about 71% of the company's turnover. Based on the second quarter growth rate, sales revenue is projected at N95.7 billion for MRS Oil in 2014.

The revenue anticipated for the year will represent an increase of 9.1% over the turnover figure of N87.74 billion the company posted in 2013. This means the company is expected to sustain revenue growth for the third year running though growth is expected to keep decelerating from 11.5% in 2012 and 10.1% in 2013. Slow growth in sales revenue is the general trend in the petroleum marketing group this year.

MRS Oil grew after tax profit by 64% to N315 million year-on-year at the end of the second quarter. It is expected to close the year with an after tax profit in the region of N640 million, which will be a marginal increase over the full year profit of N630 million the company reported last year. Profit growth could be stronger than projected if the accelerated growth recorded in the second half of last year is repeated this year.

The company improved profit margin on year-on-year basis from 0.4% in June last year to 0.7% at the end of June this year. Profit margin is however unchanged from the company's position at the end of last year. Its profit margin is a distant lowest within the petroleum marketing sector that is led by Mobil Oil at 11.4%, followed by Oando 4.6% and Forte Oil with 3.9% at the end of the second quarter. Total closed its second quarter operations with a net profit margin of 1.8% and Conoil recorded a net profit margin of 1.3% during the same period.

There was a slight moderation in cost of sales during the review period, which permitted an increase of 6.5% in gross profit at N2.94 billion. This was reinforced by a rise of 61.3% in other income to N434 million and a drop of 25.2% in selling and distribution expenses. Administrative expenses claimed an increased proportion of sales revenue during the period. Despite that, the company still grew operating profit by 45.5% to N608 million.

Another favourable event is a growth of 202% in interest income to about N154 million, which caused a drop of 10.6% in net finance costs at the end of the second quarter. An increase of 131% in tax provision finally lowered the growth of the bottom line.

The company earned N1.24 per share at the end of the second quarter, up from 76 kobo in the corresponding period last year. Earnings per share of N2.52 is anticipated from MRS Oil at the end of this year. The company earned N2.48 per share in the 2013 full year.

Major developments in the balance sheet from the end of last year's position include a drop of 34.7% in cash and bank balances to N8.57 billion, an increase of about 45% in loans and receivables to N1.41 billion and a 24% growth in inventories to N9.58 billion. The company's short-term borrowings also went down by 8.6% to N14.46 billion over the same period.

Critical developments to watch on the company are revenue growth prospects and any gain or loss in profit margin. Accelerated profit growth achieved in the second half of last year was due to improvement in profit margin. Any improvement in profit margin will lead to a stronger growth in profit than has been projected.  Without improving profit margin, management will have to push sales revenue in the second half of the year to be able to step up profit recovery in 2014.