Why Shares of Oando is Rising Amidst Huge Debt.

Oando stock price

The price of Oando stock has been trending higher in the last 6 days, a bullish run with no recent corporate announcements. As of this analysis, the oil stock trade for N7.25, up by 9.85% in today’s trading session with YTD return now at 45%.

Let us look at the performance of the stock on a chart and analyse the trend of the stock for short term traders who might want to buy at the current market price.

On the chart above, I added the 50-day simple moving average (SMA) to gauge market sentiment towards the oil stock. Between November 2018 and December 2018, Oando stock was resisted at the 50-day line; each time the stock trend close to average, it turned bearish. (as indicated by A, B, C and D) But, notice how that same 50-day SMA rejection (which would have occurred at the region marked E ) was broken as the price went up through the resistance with a stronger run from N4.76 (and cross above the 200-day SMA) to N7.25, 52%.

The stock’s RSI (region G) is 77.82, already overbought; short term profit taking isn’t far, you are advised to trade with caution at this point as the current market price might be too high to get, except you are in for a long term.

Relative Strength Index lets you know when a stock is due for a correction (also known as overbought) after a bullish run and when its set for another run on selling off. A reading above 70 means the stock may be overbought and as such profit taking is most likely while levels below 30 is a sign that it is already oversold.

Why are investors mopping up Oando’s stock despite the huge debt figure confronting the company?

To answer this question,  we need to look at the company’s latest result against its previous comparable period (2017):

Revenue for the period was N505.1 billion, an increase of 32% compared to the same period in 2017 (N383.5 billion). This was primarily driven by an increase in commodity prices (Oil increased by 45% to $71.42/ bbl from $49.42/ bbl in the same period in 2017 while NGL also increased by 31% and 6% respectively.

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On a quarterly basis, revenue increased from N116.3 to N207.7, up by 78%.

Gross Profit
Gross Profit for the first nine months was N77.6 billion, an increase of 9% compared to
the same period in 2017 (N71.2 billion). The increase is primarily driven by higher
revenue as a result of higher commodity prices.

Gross profit margin nosedived from 18% in 2017 to 15% in 2018. This was a result of a 36% increase in the cost of sales which also expanded by more than 100% Q on Q.

Operation profit 

The firm’s operating profit is not quite impressive at it fell by 24.7% to N28.6b, from N38b reported in 9-month 2017 while on a quarterly basis, it went down by 37%. This is a result of a sharp drop in other operating income to N184m, from N4.6b

Interest Coverage Ratio

This is a measure of the company’s profit from the operation can finance its interest on outstanding debt. Higher coverage is healthy while a lower figure is a red-sign. For Oando, it reported at a profit before interest and tax of N35.9b, 14% lower than N42.1b realised in Q3 2017 while finance cost prints at N31.9 in its latest 9-month result vs N32b in the previous comparable period.

Based on these figures, Interest coverage is 1.12 in 2018 vs 1.31. On a quarterly basis, it also fell from 2.2 to 1.72.

While Oando is faced with a huge finance cost, it still has an acceptable profit base that can cover immediate interest obligation.

Profit-After-Tax for the period was N10.4 billion, an increase of 46% compared to the
same period in 2017 (N7.1 billion). This was clearly boosted by a tax credit of N5.6b as the firm would have reported a loss in its 9-month period. On a quarterly basis, profit after tax from NN2.5 in the 3-month period ending in September 2017 to N1.9b in 2018.

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Total Group Borrowings for the period stands at N227.2 billion, a 4% decrease from FYE
2017 (N237.4 billion) whilst specifically in the upstream subsidiary, borrowings reduced
by 16% to $271.7 million compared to $324.6 million in FYE 2017. Since FYE 2014, the
total Group borrowing have reduced by 52% from N473.3 billion while borrowing for or
our upstream subsidiary has reduced by 66% from $801.6 million.

Return on Equity Vs Debt to Equity

Return on Equity is 3.7% in Q3, 2018 against 2.7% in 2017 while debt to equity remains unchanged at 2.95. The huge debt is also reflected in the lower return and high debt ratio.

What is the estimated fair value of Oando Stock

Oando reported a Q3 EPS of 33k in 2018. While we are still expecting the company’s full-year result, let us use the EPS (TTM) of 1.24 (Q3 EPS of 33k plus Q4 2017 of 91k). At an adjusted-risk discount of 19% (this rate should go down as bond yield trend lower on weak political risk (after election)), I have a fair value estimate of N6.52 which is 11% below the market price of N7.25.

To answer the question on why investors’ are mopping up the stock, here are possible reasons for the bullish run:

  • The price below N5 was undervalued. If you had estimated the fair value (N6.52) earlier in December 2018, after the Q3 report was released, when the price was below N4.76, you would have discovered an estimated 40 – 46% upside potential before the rally started.
  • The current price of oil above $60 is supportive of the group’s positive final result. Oando’s upstream business is well positioned to take advantage of the higher energy price through production growth via investment in targeted profitable projects, whilst maintaining fiscal prudence.
  • With Buhari’s victory in the recent general election, Oando’s trading contract with NNPC on lifting more than 10 million barrels of crude oil remains intact. (Credit: @Azubikeanazor on my Stock Market Whatsapp Group)

  • Investors are also pricing in a possible tax credit which is also a “profit booster”, hence drive bottom-line performance.
  • In the latest three month result ending September 2018, the oil firm reported a 700% increase in EPS to 8k, from 1k reported in 3-months ending September 2017.
  • Putting all these together means that we can as well assume a 20% EPS growth over 91k reported in Q4 2017 (hinged on tax credit), hence project a final EPS of 1.41(this is nearly impossible) to put our fair value at a cap of N7.42.
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My opinion.

At a current price of N7.25, Oando is already overvalued, a pullback is imminent in the short term. You might need to wait for the price to fall on profit-taking to consider an entry.

For long term investor, sentiments seem to be positive on continued crude oil lifting contract with NNPC  and bullish oil price, now above $60.

The negative retained earnings of N211b means that the oil stock may not declare a final dividend for now. The stock may be good for investors seeking long term capital appreciation.

Technical, the 50-day SMA (5.05) is showing a rising trend and if the company releases impressive FY 2018 numbers, a golden cross is imminent this year.

Disclaimer: I don’t own Oando stock but may consider the stock if it forms a golden cross. You are strongly advised to do your homework or consult your financial adviser for buy or sell recommendations.

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