Conoil: Growing shareholders’ value

Conoil drew on its efficient internal cost control and intrinsic underlying business strengths to deliver impressive performance in its latest audit report. The announcement of the results has seen investors scrambling for the shares of the downstream oil major. In this report, Capital Market Editor, Taofik Salako, highlights the key performance indicators that have been driving the rally for Conoil
Conoil opens today as one of the most-sought-after stocks in the Nigerian stock market. The company’s share price rose by 15.6 per cent last week, the second highest gain recorded in the entire stock market. Against the facts that the average benchmark index for the Nigerian stock market, the All Share Index (ASI), indicated that the market recorded an average decline of 0.65 per cent and there were 38 losers to 24 gainers, the performance of Conoil underscored the scramble for its stocks. The increased demand for the downstream oil major was fuelled by the release of its annual report and accounts for the year ended December 31, 2015.
Impressive fundamentals
Key extracts of the audited report and accounts for the year ended December 31, 2015, showed that profit after tax rose by 176.5 per cent from N834 million in 2014 to N2.3 billion in 2015. Profit before tax jumped by 125.1 per cent from N1.5 billion in 2014 to N3.4 billion in 2015. Turnover dropped from N128.35 billion in 2014 to N82.92 billion in 2015, following the industry trend as oil and gas companies struggled with global fluctuations and domestic constraints. Conoil fell back on its internal cost management and control to optimise the top-line performance. With this, gross profit margin improved from 10.74 per cent in 2014 to 13.91 per cent in 2015. Administrative expenses dropped from N8.16 billion in 2014 to N6.89 billion in 2015. Pre-tax profit margin, which measures the underlying profitability of the company, quadrupled from 1.19 per cent to 4.16 per cent. Earnings per share also rose sharply by 177 per cent to N3.33 in 2015 as against N1.20 in 2014. While the paid up share capital remained unchanged at N346.98 million, shareholders’ funds increased from N16.1 billion in 2014 to N17.71 billion in 2015. Net assets per share closed in 2015 at N25.52, compared with N23.19 in 2014.
The board of directors of the company has recommended distribution of N2.1 billion as gross dividend for the 2015 business year, 200 per cent above N694 million distributed for the 2014 business year. Shareholders will receive a dividend per share of N3 for the 2015 business year as against N1 paid for the 2014 business year. At the opening price today, the dividend per share represents a dividend-yield of 12.6 per cent, clearly a high yield and within the highest bracket for the stock market. The latest results have further buttressed analysts’ position that Conoil, along with several other stocks at the stock market, is undervalued. With net assets per share of N25.52, today’s share opening price of N23.79 represents a significant undervaluation of the stock, given that a typical share price represents multiple of the net asset.

Consistent returns
Notwithstanding the challenges in the Nigerian downstream oil and gas sector, Conoil has carved a somewhat unique position as the only indigenous downstream oil company with consistent year-on-year dividend payouts over the past 15 years. Over the past 15 years, the company has distributed about N21 billion as cash dividends to shareholders, in addition to 20 per cent increase in their shareholdings as bonus shares. From a gross payout of N171.5 million in 2001, gross dividend has averaged about N1.4 billion over the past one and a half decades. The 2015 distribution represents the second highest gross payout during the period, trailing N2.78 billion distributed for the 2013 business year. Current earnings yields, based on the full year performance, stands at about 16.2 per cent, the highest within the oil and gas sector. Earnings yield- a forward-looking indicator that relates fundamental earnings to share price, provides a bridge between corporate earnings and share pricing trend.  While the year-to-date return and latest operational fundamentals illustrate the historic returns by a stock, earnings yield underlines the potential return and intrinsic value in a stock. Earnings yield is calculated by finding the percentage of current net earnings per share of a stock to the current share price at the stock market, to determine the probable underlying yield for the stock. Besides its importance as a measure of intrinsic returns, earnings yield also denotes probable cash dividend range given its unique feature as a ratio of basic earnings per share. Earnings per share represents net profit earned by every outstanding share of a company within a period. The board, subject to approval of the shareholders at a general meeting, will then decide on the amount of dividend to be paid from the earnings per share. For companies with long-established dividend payment policy, probable dividend could be deduced on the basis of current earnings per share.
Diversified ownership, stable board
 
Conoil is owned by more than 143,000 shareholders and it’s quoted on the Nigerian Stock Exchange (NSE). The company commenced operations in 1927 under the name Shell Trading Company. It was incorporated as a limited liability company in 1960 and converted to a public limited liability company in 1991. Conoil metamorphosed from the decrepit government-controlled National Oil and Chemical Marketing Plc, which was privatized in 2000. Conpetro Limited had acquired 60 per cent majority equity stake in 2000 and subsequently increased its shareholding to 74.40 per cent. Conoil has benefitted from its diversified retail shareholders’ base, with the active shareholders’ nudge for better returns, and a focused long-term majority core investor, with the attendant stable board and management. Particularly, the growth-focused and altruistic nature of the core investor led by Dr. Mike Adenuga (Jr.) has contributed greatly to the stability of the downstream oil company in the turbulent oil sector. Adenuga chairs a stable board of director that has steered the company since privatization. The company has appropriate governance structures including board and management committees in compliance with Nigeria’s code of corporate governance for publicly quoted companies and international best practices. Beyond compliance with laws and regulations, Conoil operates a more respectable corporate governance standard. While Adenuga’s Conpetro-as the core investor, provides strategic and technical supports to the company, Adenuga receives no emoluments and Conpetro charges no fees- an uncommon noble stand in true spirit of core investor contrary to rampant practices, especially in the oil-marketing sector, where substantial funds are funneled to core investors, sometimes to the detriment of other shareholders.
Management forecasts
 
The management of Conoil attributed the strong performance in 2015 to efficient management of resources, effective cost control policy as well as gains from its huge investment in the expansion and upgrade of its facilities.
“For us, the downstream sector remains fundamentally attractive and viable today and in the future.  With our clarity of direction and focus, our company’s long-term success is assured. We will sustain this improved performance and vigorously pursue our aspiration to remain the nation’s leading petroleum products marketer and one of the most profitable quoted companies,” the company stated in an explanatory note to the results.
At the company’s last annual general meeting, Adenuga Jr. had promised shareholders that notwithstanding the tough macroeconomic conditions and the challenges in the downstream petroleum sector, the company would explore to the fullest, new opportunities that abound in the industry to its advantage.
He assured that the company is determined to sustain the culture of taking advantage of opportunities in the emerging markets and organising efforts and resources   along   enduring   strategies   for   top performance. “There is an ongoing   review of our business processes   to   boost commercial, innovation and   supply chain efficiencies, to improve   focus on growth opportunities and to enhance competencies that will drive accelerated progress,” Adenuga said.
Looking forward
 
Against the background of global and national macroeconomic situation as well as industry-specific challenges, the natural poser will be the sustainability of Conoil’s performance. Conoil has repeatedly noted that the foundation for its impressive performance was hinged on consistent investments and committed to expansion of its businesses. These are also supported by the general overhaul of its facilities and equipment, the optimization of its resources and total elimination of waste in its operations.
According to the board’s strategic outlook and management guide, Conoil is gearing up for the anticipated challenges and opportunities   that the emerging new order  in the downstream oil sector  is expected to usher in. The company said it has flagged off various projects and initiatives which will help it to capitalise and reinforce its strong position to     deliver profitable growth for its teeming shareholders. It has stepped up investments in the core segments of the downstream business with a     view to consolidating its competitive edge and breaking new grounds to further boost its market share.
The strategic investment project entails upgrading and construction of facilities in the priority areas, such as retail, lubricants, aviation and specialized products, so as to     provide additional capacity that will enable it to meet the long-term needs of its growing business.
The focus of the initiatives being   pursued, according to Conoil, is to   deepen the company’s market penetration   and  establish new streams   of   income  to  further  strengthen its competitive edge. Conoil’s state of the art facilities at its depots in Lagos and Port Harcourt give it unparalleled leverage in storage and blending of products, in conformity with the world’s best industry practices. The depots ensure availability and prompt delivery of products   and services to customers nationwide. In Port Harcourt, the company regularly augments its storage capacity for different products to meet the demands of customers in the south-south, south-east and the northern regional markets. This has improved throughput at Port Harcourt and also saved transportation time and cost of moving products from Lagos to these areas.  Similarly, a new full-fledged depot in Calabar is well under way, which would have storage tanks for Aviation Turbine Fuel, Automotive Gas Oil and Premium Motor Spirit. The depot would also have hi-tech loading gantries with allied facilities of international standard.
As part of efforts to boost its bottom-line,  Conoil has also repositioned its lubricants  business, building two additional state-of-the-art oil blending plants in Apapa, Lagos and  another one in  Port Harcourt, all of which the management said had  pushed up its     production capacity significantly. The company also introduced into the market, a new     brand of engine oil called Okada Golden Super which is manufactured specially for 4-stroke motorcycles and tricycles. The  company   is   also   consolidating its stronghold   on   the   aviation   fuel marketing business in terms of spread, storage capacity and maintenance support. Major airlines     plying the Nigerian airspace have been flocking to the company to take full advantage of the   unique  services. Its impressive  storage   facilities   give   the   company   unmatched     capacity to meet the needs of local and international customers. The hi-tech bowsers as well as quality product and service delivery, which are of essence in the industry, are some of the reasons the company continues to attract the best of clientele in that sector.
There have also  been   massive   investments in   the  retail segment.  The company   is   currently upgrading over 400 filling stations across the country; while plans are on to     acquire another 250 stations that would significantly boost its retail network. Besides the     ongoing project of building one mega station in each state capital, it has sustained its     special university campus scheme, under which retail outlets are being located on the     campuses of designated universities and polytechnics across the country.
Besides, Conoil’s Liquefied Petroleum Gas (LPG)-produced and distributed from its state-of-the-art LPG bottling plant located in Ikeja, Lagos; has become a major source of industrial and domestic cooking fuel. The plant has the capacity to bottle 5,000 cylinders a day, boosting supply of cooking gas in the country.
No doubt, with the protracted reform and many lingering often-negative controversies in the Nigerian downstream sector, the industry remains challenging as indicated by sluggish top-line, industry-wide decline in margins and negative bottom-line growth by most companies. But ongoing growth initiatives by Conoil including ambitious expansion into the West African market; increase in storage, blending, distribution, retail and dispensing facilities and strong linkages and partnerships with other businesses provide reassurance on future growth prospects. Conoil’s commitment to long-term investments, supportive and farsighted board, dynamic management and sound local intelligence provide reasonable assurance on the prospects of the oil major in the years ahead. It is one assurance that shareholders need most in the face of the macroeconomic challenges, including the price depression at the stock market.