Acquisition-related charges weigh on results

· Underperform rating maintained: In Q1 2017, Mobil Oil Nigeria (Mobil) delivered a PBT decline of -15% y/y and the PBT missed our PBT estimate by around 10%. Similar to Total Nigeria (Total), gross margin compression completely offset benefits coming through from strong topline growth.

PAT was worse off because of a pension-related expense of N2.0bn following the conversion of a significant portion of the firm’s Defined Benefit Scheme to a Defined Contribution Scheme. We cannot rule out further acquisition-related charges over subsequent quarters. Following the negative earnings surprise in Q1 2017, we have cut our EPS forecasts over the 2017-19E period by 18% on average.

Our new price target of N180.0 is down by a similar magnitude. From current levels, we see an implied downside potential of -46% and retain our Underperform rating on the stock.

Notwithstanding, we note that a tender offer to minority shareholders at a price similar to the acquisition deal price (N417/share) is a strong possibility, and would continue to influence trading patterns in the near term. Year-to-date, Mobil shares have appreciated +19%, outperforming the NSE ASI by around 21%.

However, in the last month, the shares have underperformed the market, down -7.8% (ASI up +3%). They are currently trading on a 2017E P/E multiple of 21.1x for an EPS growth of 13% in 2018E; this compares with a 2017E P/E multiple of 9.6x for an EPS decline of -14% in 2018E for Total.
· Q1 2017 PAT down significantly due to exceptional charge of N2bn: Q1 2017 sales grew 11% y/y to N25.2bn while PBT and PAT both declined y/y. PBT fell -15% y/y to N2.3bn but PAT declined much more to N13m.

Following the recent acquisition of a majority stake in Mobil by NIPCO a significant portion of the firm’s Defined Benefit Scheme was migrated to a Defined Contribution Scheme, leading to an actuarial loss of c.N2.0bn. Additionally, a gross margin contraction of -480bps y/y to 12% more than offset any benefits coming through from the double-digit topline growth, a 13% y/y rise in other income and flattish opex, leading to the PBT decline of -15% y/y. Sequentially, while sales were up 13% q/q, PBT declined by -36% q/q. PAT was down significantly as a result of the actuarial loss stated above. Compared with our estimates, while sales beat our N21.5bn forecast by 17%, PBT came in behind by 10% due to a negative surprise on the gross margin line.

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