Why Total Energies Nigeria stock is undervalued despite a decline in earnings

Total Energies has consistently delivered solid positive revenue over the years. In the past five years (except for 2019 and 2020), the company recorded a CAGR of 4.3 per cent and 20.17 per cent in revenue and earnings, respectively.

The oil firm recorded a revenue shortfall in 2019 due to supply challenges, owing to the regulated price of PMS at N145 per litre. More so, price distortions in diesel and Jet A1 markets as a result of constant NNPC interventions in these markets, also contributed to the decline in revenue.

In 2020, the firm’s revenue dipped further as a result of the COVID-19. The effect of COVID-19 lockdowns by the Federal Government of Nigeria put businesses on hold and grounded vehicular movement. The meant that the company couldn’t sell enough fuel to earn more revenue.

But in 2022, Total Energies was back to reporting revenue growth. The company recorded N337.188 billion as of Q3 2022, marking a 39.21 per cent increase compared to the revenue recorded during the comparable period in 2021.

In our opinion, “We believe Total Energies will continue to grow its revenue all other things being equal.

“Petroleum products are the major revenue earner for Total Energies. The revenue line contributed over 70 per cent to total revenue between 2018 and 2021. However, with the strides made by the firm’s management to venture into solar energy, the contribution from lubricants and others has continued to increase over time.

“For example, in 2018 lubricants and others contributed only 15.96 per cent while it grew to 25.23 per cent in 2021 and 27.17 per cent in the first nine months of 2022, indicating the need revenue diversification to forestall shocks.

“The positioning of Total Energies in the solar energy space remains highly strategic and a well-thought-out decision that will put them ahead of the pack.

“But the major challenge analysed is the high cost of sales. The Cost of Sales (COS) is the highest cost driver for Total Energies as it gulps well above 80 per cent of its total revenue. Between 2018 and 2021, the firm expanded on average of 86.40 per cent per year of its revenue on the cost of goods sold.

“In the nine months of 2022, the company has expended 88.41 per cent of its revenue on the cost of goods sold, primarily on the back of a 42.3 per cent rise in net changes in inventory of lubes, greases and refined products. Consequently, earnings declined by 6.57 per cent to N12.506 billion in 2022 from N13,386 billion recorded a year ago, while earnings per share declined by 6.59 to N36.83 per share.

“Analysis of Comparable: In 2021, the firm recorded the highest Earnings Per Share which was N49.66 with Conoil coming a distant second at N4.44 which is 11.18x lower that Total Energies.

“In terms of price to earnings (P/E), excluding Ardova and Eterna which recorded losses in FY 2021, Total Energies had the lowest P/E ratio. It had the best profitability ratio when compared with its peers. The firm recorded an 8.08 per cent return on assets while it recorded a 40.52 per cent Return on Equity.

“It had the best dividend yield when compared with its peers. Although Conoil’s dividend payout ratio stood at 56.30 per cent, Total Energies’ dividend payout was 44.70 per cent which signifies a good balance between investor compensation for risk and growth potentials.

“Valuation: Trading at a trailing 12 months price-to-earnings ratio of 4x, below the NG market ratio of 7x, indicates that at the current price, the stock is cheaper for an investor relative to its earnings potential, invariably, pinpointing that the firm’s stock is undervalued.

“Another key important factor is that Total Energies is a dividend-paying company that implies a steady flow of income to investors and currently offers a dividend yield of 9.43 per cent.

“Adopting the earnings multiple techniques, we recommend a buy on the sticker.”