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Nigeria Corporate Analysis | Public Rating

Eterna PLC Nigeria Corporate Analysis June 2018

Financial data:

(USD’m comparative)

31/12/16 31/12/17

N/USD (avg.) 252.7 305.3

N/USD (close) 304.5 305.5

Total assets 104.0 156.9

Total debt 23.2 25.7

Total capital 35.5 40.2

Cash & equiv. 23.4 14.7

Turnover 423.0 566.8

EBITDA 26.8 11.6

NPAT 5.8 6.6

Op. cash flow 30.5 17.7

Market cap * USD26,103m

* As at 21/06/2018 , @ N359.7/USD

Rating history: Initial/new rating (June 2018)

Long term: BBB(NG)

Short term: A2(NG)

Rating Outlook: Stable

Rating methodologies/research Global Master Criteria for rating Corporate

entities (updated February, 2018)

Glossary of terms/ratios, February 2018

GCR contacts: Primary Analyst:

Kunle Ogundijo

[email protected]

Committee Chairperson:

Dave King

[email protected]

Analyst location: Lagos, Nigeria

+23 41 904 9462

Website: http://www.globalratings.com.ng

Summary rating rationale

Eterna PLC (“Eterna”, “group” or the “Company”) is an integrated energy

company, with operations focussed on the downstream sector of the oil and

gas industry. Although, Eterna has a relatively small market share for

petroleum products, its significant assets across the value chain (including

storage facilities and a lubes plant) positions it well to take advantage of

opportunities in the industry. Eterna also leverages upon extensive

technical expertise, linkages with well-established international partners,

and off-take arrangements with big corporates and oil exploration

companies.

Notwithstanding the potential for profit enhancement, Global Credit

Rating (“GCR”) considers trading operation to be highly risky. The

volumes and debt funding required to facilitate the business are very large,

while the thin margin does not provide any headroom for unexpected

delays or oil price volatility. Although, revenue from the retail and

lubricant segments are lower, earning streams are more predictable,

helping to reduce risk, with the higher margins serving to bolster

sustainable earnings.

The network of fuel retail outlets, combined with the blending capacity in

the Lubricant and Chemical segment present less risky opportunities for

sustainable growth. While margins in fuel retail are also thin, due to

government regulations, there are opportunities to widen margins through

improved service offering and economies of scale. Given the higher

margin potential, Eterna plans to expand the retail and distributor network

to increase accessibility to lubricants across the country.

Notwithstanding the volatility caused by trading activities and crude

prices, as evidenced by the spike in the operating margin in FY16 and the

decline in FY17, Eterna has steadily increased its scale, with operating

profit having doubled between FY13 and FY17.

Eterna maintains sufficient funding facilities to cover trading and

inventory requirement even under stressed scenarios. Thus, trade credit

facilities totalling USD500m have been secured from some leading banks.

Up to N10bn (around USD25m) has been drawn at a given time to import

inventories, only a small portion of the available lines. Having multiple

lines with the different banks is important to help Eterna ensure that it is

able to obtain the most competitive rates.

The retention of earnings has facilitated strong cash accumulation, with

cash holdings increasing to a high N7.1bn at FY16. Accordingly the

Company has been able to fund a portion of working capital requirements

internally, thus maintaining gearing metrics at moderate levels. Thus, net

gearing registered at 27% at FY17, from an ungeared position previously.

In addition, net interest coverage has been strong over the review period.

Factors that could trigger a rating action may include

Positive change: Attainment of targeted volumes growth in all product

segments (especially in the retail, chemical and lubricant segment),

combined with effective cost management, resulting in improved earnings

margins and stronger credit protection metrics.

Negative change: Excessive gearing, even to fund profitable transactions,

could result in a downgrade. This is particularly true in light of the vagaries

of oil market environment and general operating environment, which could

materially impact earnings and lead to liquidity strain and debt service

challenges.

Rating class Rating scale Rating Rating Outlook Expiry date Long term National BBB(NG)

Stable June 2019 Short term National A2(NG)

http://globalratings.net/reports_section/


Background and recent developments

Eterna was incorporated in 1989 as a private limited

company, with operations commencing in 1991. In 1997,

the Company converted to a public limited company, with

its shares quoted on The Nigerian Stock Exchange

(“NSE”) in 1998. Eterna is an integrated energy company,

primarily engaged in the importation and bulk/retail sale

of petroleum products, gas and crude oil trading, as well

as the manufacture and sale of lubricating oils. Other

activities include; offshore and onshore oil services, gas

processing, bunkering, equipment supply services and

other engineering & technical services for the energy

sector

The marketing and sale of Premium Motor Spirit (“PMS”

or “Petrol”), Automotive Gas Oil (“AGO” or “diesel”) and

other products are carried out through Eterna’s retail

outlets across the country. The Company enjoys a

technical partnership arrangement with Castrol BP

(“Castrol”), one of the foremost manufacturers of

lubricants and specialty chemicals. The relationship which

commenced in 1991 gave rise to a distributorship

agreement and an exclusive right to manufacture and

market Castrol products in Nigeria. Eterna has a wide

range of lubricant products, categorised into two main

offerings, namely;

1) Automotive and Industrial Lubricants - engine oil,

gear oil, hydraulic oil and other specialty oils.

2) Marine Lubricants - main engine oil, turbine oil,

compressor oil, refrigerator oil, and grease.

To expand operations and improve profitability,

significant investments have been made in various fuel

facilities in recent years, including;

A coastal tank farm (for storage of petroleum

products) in Lagos, with over 30 million litres

capacity

An aviation fuel depot at the Nnamdi Azikwe

International Airport, Abuja with a capacity of 2.8

million litres

19 fuel stations, spread in major cities across the

country.

A lubes blending plant in Sagamu, Ogun State. It is

the third plant in Africa possessing exclusive rights to

manufacture Castrol products. The Plant houses a

well-equipped laboratory with hi-tech equipment

which has ensured that the Castrol quality standard is

maintained. According to management, the plant has

an annual capacity of 45,000MT.

Eterna has recently commenced strategic investments

in the distribution of natural gas, liquefied petroleum

gas and other associated products. In addition,

alliances are also being formed to benefit from

franchising opportunities that cover building of truck

parks, convenience stores, among other investments.

Alongside the parent company, the group structure

comprises two subsidiaries;

Eterna Industries Limited: engaged in the

manufacturing of lubricants, and all products are sold to

the group.

Eterna Marine Services Limited: principal activity is the

distribution of marine lubricants, however, the company

has not been operational in the last few years.

Table 1 provides a summary of key milestones achieved.

Table 1: Key milestones

Year Milestones achieved/attained

1991 Technical and commercial agreement signed with Castrol and

commenced marketing of Castrol products in Nigeria.

1995 Commissioned its first modern retail outlet in Abuja

1996 Secured part funding from IFC to build first Castrol certified

plant

1998

Converted to a public limited company, with its shares quoted on

the stock exchange, thus becoming the first indigenous

petroleum products marketing company to have shares listed on

the exchange.

1998-2001

Became a recognisable supplier of lubes and fuels and later, the

leading marine lubricants seller in Nigeria, with a portfolio

comprising market leaders, including multinational companies.

2004 Lenux Integrated Resources Limited bought a portion of Eterna shares, and subsequently assumed management control of the

Company.

2005 Restructuring/turnaround of the Company commenced

2006 Won Pearl Awards for achieving the highest turnover growth

amongst publically quoted companies

2007

Rebranded to a new corporate identity, including new logo and

the introduction of new lubricants

Raised additional capital of N1.5bn from existing shareholders to expand capacity

2008

Received Standards Organisation of Nigeria certification

NIS:ISO 9001: 2000 standard for Quality Management System

Acquired 30,000 metric tonnes capacity storage tank in Lagos for petroleum products

Acquired an aviation tank farm in Abuja

2009 Re-capitalisation was achieved through a hybrid offer, consisting

of public offer and a Rights’ Issue

2011 Oil and gas brand marketing award by African Brand Leadership Award

2017

Acquired a mega petroleum product retail outlet in Abuja

Re-launched the Castrol Automotive Lubricant Brand- now

blended at the Eterna plant Source: Management

Eterna has a number of policy procedures and guidelines

to manage business processes and operations, including

external relationships, in order to maintain set objectives

and compliance requirements. Some of these policies

documents include; risk management, environmental

health, safety and security, customer service. Major

trading partners include; Vitol Sa, BP Oil Trading

International, Glencore (UK) Energy Limited, Feedco Sa,

Nigerian National Petroleum Corporation, Castrol

Offshore Limited, Gulf Petrochem Energy Services.

Risk Management

Following a holistic review of its operations and the

operating environment, a risk management framework

was developed (in conjunction with KPMG Professional

Services) to provide an overview of the various risks

Eterna PLC is exposed to, as well as institutionalising a

control mechanism to mitigate the identified risks.

Furthermore, the effectiveness of the control system in

place is monitored using a cloud based application

(PROMAPP), which maps all risks to business processes.

GCR positively notes the implementation of the enterprise

risk management system, which has created a more risk

focussed culture across the organisation, thus enabling the


elimination of redundant processes and improving the

efficient allocation of resources.

Ongoing litigation

Although, there are a number of cases in court, in terms of

materiality, GCR notes a lingering case with the Federal

Government (“FG”), pertaining to an outstanding

receivable of N1.5bn in respect of unpaid subsidy claims

for PMS imports. The FG has alleged that the submissions

in support of the subsidy were false, hence the institution

of criminal proceedings. On the other hand Eterna claims

it has not received any illegal benefits and is confident of

victory in the court. Therefore the outstanding sum is

being reflected as a receivable and will serve to boost cash

flow if received.

Shareholding and corporate governance

Eterna is managed by a Board of Directors (“Board”)

comprising two executive directors and six non-executive

directors, including an independent director and the

Chairman. The board comprises a number of seasoned

professionals with several years of experience in different

fields, including business management, accounting,

marketing, law etc. Some of the directors also hold other

directorships in other companies. The board meets at least

quarterly to formulate policies and oversee the effective

management of the Company. Other roles of the board

include; risk identification, monitoring and management

and overseeing the effectiveness and adequacy of internal

controls. The management team (led by the managing

director) is responsible for the day to day running of the

Company, with support from Board committees.

Eterna’s corporate governance framework is in

compliance with the relevant requirements of the

Companies and Allied Matters Act and the Nigeria Stock

Exchange listing requirements.

Table 3: Corporate governance summary

Description Findings

Directors

2 executive (CEO and CFO)

6 non-executive (including an independent

director and the Chairman)

Frequency of meetings At least quarterly

Separation of Chairman Yes

Board committee

Audit Committee; Risk Management,

Finance and Investment; Governance and

Remuneration Internal control and

compliance Yes, reports to the audit committee

External auditor Deloitte and Touche; an unqualified, clean audit opinion was issued for FY17

The shareholding structure is dominated by four major

shareholders, which have maintained their stakes for

several years. Lenux Integrated Resources Limited is

represented by three directors on the Board. The

remainder of shares are held by a diverse base of 26,417

different shareholders.

Table 2: Major shareholders No of shares % holding

Lenux Integrated Resources Limited. 250,156,231 19.18

Global Energy Eng. & Raw Materials Limited 179,990,000 13.80

Radix Trustees Limited 80,958,007 6.21

Meristem Stockbrokers Limited 67,000,000 5.14

Industry Overview and Competitive Position

The petroleum sector in Nigeria has evolved over the

decades into a distinct and major part of the Nigerian

economy. According to recent information released by the

National Bureau of Statistics (“NBS”), the sector

contributed about 9.61% of real GDP during 1Q 2018.

Activities in the sector are classified as Upstream,

Midstream and Downstream activities. Upstream activities

include prospecting, exploration, mining and distribution

of crude oil, while Midstream activities involve the

conversion of crude oil into various useable products

through the refining process. Downstream activities

include the distribution and marketing of the petroleum

products produced by the refineries.

In terms of regulation and governance, the Ministry of

Petroleum Resources has the responsibility for the

articulation, implementation and regulation of policies in

the oil and gas sector, exercising supervisory role over the

operators and stakeholders. On the other hand, the

Department of Petroleum Resources (“DPR”) is

responsible for ensuring compliance with petroleum laws

and regulations. This involves monitoring operations

across the value chain.

The downstream oil and gas industry is dominated by a

few large players, with about nine firms controlling about

73% of the total market for petroleum products. The

Nigerian National Petroleum Corporation (“NNPC”)1 is

the largest, accounting for about 13% of total market

value. The remaining 27% is split across over 3,000

independent petroleum marketers, who are members of

the Independent Marketers Association of Nigeria

(“IPMAN”). The six major marketing companies belong

to the trade group known as the Major Oil Marketers

Association of Nigeria (“MOMAN”), and account for

around 60% of the petroleum products distributed.

Business activities encompass sourcing refined petrol,

storage and distribution of petroleum products to end

users.

Nigeria has four refineries with an estimated production

capacity of 445,000 barrels per day (bbl/d). However, the

refineries operate well below capacity, owing to

operational challenges, poor maintenance and pipeline

vandalisation. Hence, petroleum marketers mainly source

refined petroleum products through imports. The FG has,

however, showed some resolve to reform the sector by

issuing modular refining licences to some Nigerian

companies.

The downstream sector is characterised by low profit

margins and a high cost of sales, historically above 80%

of turnover. This is due to the significant government

regulation evidenced in setting the price of products. In

1The NNPC is a state-owned oil corporation established in 1977. It is actively involved in

the activities of the downstream petroleum industry through two of its subsidiaries namely;

the Pipelines and Marketing Company (“PPMC”) and NNPC Retail Limited. The PPMC is

the product distribution arm of NNPC which is directly responsible for the sourcing and

distribution of petroleum products to all parts of the country, at a uniform price. The NNPC

Retail Limited, on the other hand, has the mandate to establish and profitably operate model

retail outlets for the supply of petroleum and allied products to customers. It currently

operates 37 Mega Stations, 12 Floating Mega Stations and over 500 Affiliate Stations

across Nigeria. The NNPC also owns 23 depots nationwide. Its share of the market has been

put at 13%, with expectation to increase it to 30%.


this regard, to maintain petroleum price stability and

ensure relatively constant prices throughout the country,

the Government set up the Petroleum Support Fund

(“PSF”) and the Petroleum Equalisation Fund (“PEF”).

Under the PSF, the importer is required to sell the

petroleum products in line with the price recommended by

Petroleum Products Pricing Regulatory Agency,

(“PPPRA”) even though the import landing price of the

products may be higher or lower. Oil marketers who

qualify to receive claims under the PSF are then paid

subsidies if there is an under-recovery, while any excess is

reimbursed to the fund. Prices are not completely static

and do adjust to account for extended periods of

international oil prices rises/declines. However, the

subsidy scheme has, historically, been fraught with

delayed payments to petroleum marketers, thereby putting

pressure on their working capital management.

While the pricing of some petroleum products (including

diesel) has been partially or fully deregulated over the past

few years, PMS remained subsidised at a pump price of

N86.5 per litre until May 2016 when the FG introduced a

price modulation mechanism designed to more closely

reflect cost and market dynamics. Thus, price guidance of

N135-N145/litre was given, with marketers mainly selling

at the maximum price. In recent months, the NNPC has

become the sole importer of petroleum products in

Nigeria, with other players relying on the agency for

supply. This has been attributed to the higher landing cost

of N191/litre for PMS (well above the approved price),

occasioned by the weaker exchange rate and higher

international price of crude oil.

Competitive position Table 4: Competitive position – Major Petroleum Marketing Companies

FY17 (N'm) Eterna

PLC Total Forte Mobil

Conoil

Plc Oando Plc

Turnover 173,030.2 288,062.7 129,443.8 125,257.1 115,513.2 497,422.5

Gross Profit 6,337.3 29,295.9 24,115.9 15,273.4 13,049.4 88,081.4

EBITDA 3,544.1 11,794.0 18,687.3 8,782.2 581.4 28,947.3

Op. Income 3,163.1 8,333.1 13,375.5 5,623.9 (141.1) 10,187.6

Net interest (393.4) (473.9) (2,748.3) 281.9 (2,137.2) (33,784.1)

NPAT 2,001.9 8,019.3 12,226.4 7,518.7 (1,578.5) 13,469.2

Equity 12,291.7 28,175.0 55,068.6 27,294.2 17,839.9 263,465.8

Total debt 7,847.9 13,135.0 34,755.1 0.0 5,178.8 237,942.3

Cash 4,484.5 12,162.8 1,771.9 4,389.6 25,774.8 7,896.1

Current assets 39,764.2 72,244.9 76,018.6 37,821.7 57,372.0 105,940.1

Total assets 47,920.4 107,931.3 147,027.2 74,484.3 62,802.0 1,040,175.9

Current liabilities 33,677.0 76,936.9 68,524.6 28,128.3 44,045.1 400,063.6

Ratios (%)

Rev. growth 61.9 (0.0) (12.9) 0.3 0.4 0.1

Gross margin 3.7 10.2 18.6 12.2 11.3 17.7

Op margin 1.8 2.9 10.3 4.5 (0.1) 2.0

Net int. cover (x) 8.0 17.6 4.9 (20.0) (0.1) 0.3

Total debt : equity 63.8 46.6 63.1 0.0 29.0 90.3

Net debt : equity 27.4 3.5 59.9 neg neg 87.3

Net debt

:EBITDA 94.9 8.2 176.5 neg neg 794.7

Current ratio 1.2 0.9 1.1 1.3 1.3 0.3

Table 4 is based on Company numbers sourced from audited financial Statements as at 31st

December 2017

There are eight listed players in the oil and gas sector of

the NSE, covering a range of upstream and downstream

activities. In terms of product volumes and revenue, the

industry is dominated by Oando Plc (“Oando”)2 and Total

Nigeria Plc (“Total”)

Operations/Earnings diversification

Historically, refined petroleum products have been

sourced through a combination of imports and local

supplies, especially from NNPC. However, with the FG

unwilling to increase the pump price at the moment, the

NNPC bears any shortfall arising from sale to retail

outlets. Typically, sourcing of petroleum products from

NNPC is governed by a contract. Once purchased,

products are stored at the Company’s storage facilities

until they are delivered (via trucks) to service stations, for

on-sale to end users, and commercial customer locations.

Purchases of petroleum products and other material inputs

are financed through a combination of suppliers’ credit

and short term debt. Eterna enjoys a 30-day credit period

from NNPC on crude lifting. The bulk of retail sales are

on a cash basis, with only a few customers (mostly

corporates) granted credit, and only after a detailed

assessment is carried out to determine the extent of credit

risk involved.

Operations are divided into three reporting segments;

Retail and Industrial: This segment derives revenue

from the sale and distribution of petroleum products in

retail outlets and small units and to industrial

customers across Nigeria. It is the mainstay of the

business, and has consistently accounted for a

significant portion of revenue in most years under

review. With few retail outlets, Eterna accounts for

around 1% of market share. The company does,

however, have plans to significantly escalate outlet

count. This will be achieved through the construction

of new outlets, acquisitions and franchise

arrangements. The target is for 200 retail outlets over

the medium term.

Lubricants and Chemicals: involves the

manufacture and distribution of lubricants and

chemicals to marine and energy customers across

Nigeria. The production of lubricants is done under

two distinct brands at the Company’s blending plant.

The Castrol brand of lubricants are prominent in the

premium category, attracting a higher price than the

Eterna branded lubricants, generally perceived to be

more affordable.

Trading: represents the bulk importation and sale of

fuels (PMS, AGO, DPK, ATK), base oils, bitumen,

LPG, LPFO. It also involves lifting and sales of crude

oil, which although accounting for the bulk of

revenue, does not constitute a regular source.

Table 5: Earnings

Diversification

(N'm)

Revenue (N'm) Gross Profit (N'm) Gross margin (%)

FY16 FY17 FY16 FY17 FY16 FY17

Retail & Industrial 54,026.5 56,214.8 6,257.8 3,729.3 11.6 6.6

Lubricants &

Chemicals 4,586.3 5,980.0 1,355.4 1,776.1 29.6 29.7

Trading 48,274.7 110,835.4 955.2 831.9 2.0 0.8

2 During 2017, Oando Plc divested from its downstream activities and the new firm operates

under the name “OVH Energy”


Despite contributing around two-thirds of revenue in

FY17, Trading accounted for only 13% of gross profit,

underlying the low margins in this segment. In this regard,

notwithstanding the potential for profit enhancement,

GCR considers trading operation to be highly risky. The

volumes and debt funding required to facilitate the

business are very large, while the thin margin does not

provide any headroom for unexpected delays or oil price

volatility. Nevertheless, volatility is hedged by executing

fixed term contracts with off-takers, which serves to

guarantee a certain margin on future crude trade.

While revenue from the Retail and Industrial segment

edged higher in FY17, its contribution to profit almost

halved, representing a lower 58% of gross profit (FY16:

73%). Profit margins have become inherently thinner in

this segment since the introduction of price modulation,

with margin enhancement only achievable through

economies of scale. Thus earnings are dominated by

Lubricants and Chemicals, as these products are not

subject to the same level of price regulation. According to

management, this segment provides the most favourable

growth opportunities, given the slightly higher margin, in

respect of which various activities are being explored to

increase market presence.

Financial performance

A five-year financial synopsis is reflected at the end of

this report, and commentary follows hereafter. Eterna’s

financial statements were compiled in line with

International Financial Reporting Standards (“IFRS”), as

well as the requirements of CAMA and Financial

Reporting Council of Nigeria. The current Auditors3,

Deloitte and Touche issued unqualified opinions for each

of the last three years of audited financial statements.

Growth in downstream sector of the industry is largely a

function of volumes sold and the price. Thus, after a 16%

slump to N82.3bn in FY14 (on the back of a decline in

volumes from crude trading), revenue growth rose

gradually to N106.9bn in FY16, before jumping to a high

N173bn in FY17. The uptick was mainly attributed to

increase in Trading activity, with base oil and bulk trading

of PMS and AGO more than doubling to comprise over

60% of total revenue.

Despite the significant increase in revenue in FY17, the

gross profit reduced to N6.3bn (FY16: N8.6bn), as the

thin profit margin of 0.8% on the sale of crude oil and

other bulk purchases did not compensate for the higher

cost of sale. This translated to an overall gross margin of

3.7% (FY16: 8%). Excluding N0.8bn written off as

irrecoverable debt4, general and administrative expenses

rose marginally to N2.2bn (with small increases

emanating from staff costs, repair and maintenance, legal

and professional fees), while selling and distribution

expenses remained negligible. Overall, operating profit

halved to N3.2bn in FY17, translating to a low 1.8%

operating margin.

3The previous auditor (PwC) issued unqualified audit opinions for years 2012 to 2014. 4Trade receivables PPPRA written off from the subsidy claim

The finance charge has been reported at relatively

moderate levels over the review period. This

notwithstanding, there was a large N3.5bn payment in

FY16. Of this, around N3bn related to a one-off payment

to cancel an embedded derivative option which had been

fully settled in 20155. The situation had normalised in

FY17, with the finance cost reducing to N0.5bn, partly

moderated by N0.1bn income earned off short term bank

deposits. As a result of the lower interest payment, net

interest cover strengthened to a high 8x in FY17 (FY16:

1.9x). However, excluding the derivative liability in

FY16, interest cover would have registered above 15x.

Table 6: Income statement

(N'm) FY16 FY17 % growth

Revenue 106,887.6 173,030.2 61.9

Gross Profit 8,568.4 6,337.3 (26.0)

EBITDA 6,764.1 3,544.1 (47.6)

Depreciation (340.0) (381.0) 12.1

Op. Profit 6,424.1 3,163.1 (50.8)

Net interest (3,427.9) (393.4) (88.5)

Foreign Exchange (loss)/gain 257.4 13.6 (94.7)

Other (853.4) 29.6 (103.5)

NPBT 2,400.2 2,812.9 17.2

Gross margin 8.0 3.7 -

EBITDA margin 6.3 2.0 -

Op. margin 6.0 1.8 -

Net int. cover (x) 1.9 8.0 -

Arising from the part settlement of the option in FY16, a

derivative loss of N0.9bn was reported, albeit, this is only

an accounting entry (after a fair value evaluation of the

payment) with no cashflow impact. The loss was partly

moderated by other income from sundry sources, as well

as a N0.3bn exchange gain on the translation of year-end

inventory. In FY17, the forex gain and sundry income

were much lower, but NPBT was still reported at a period

high N2.8bn (FY16: N2.4bn). After deducting a tax

charge of N0.8bn (FY16: N0.9bn), NPAT grew by around

a third to N2bn.

Cash flows

Cash generated by operations rose more than 3x to a high

N7.7bn in FY16, reflecting the jump in earnings.

Thereafter, cash generated lowered to N5.4bn in FY17,

with the variation from EBITDA mainly reflecting the

non-cash debt write off. Working capital releases were

reported in FY13 and FY14, mainly driven by large

decrease in debtors, as outstanding payments were

received. Since then, significant working capital

absorptions were reported in FY15 and FY17 (with a 5A JPY750, 000,000 zero-coupon bonds was issued by Etema Pic to Daewoo Securities

(Europe) Limited on 29 November 2009 and had been fully paid in 2015. However, due to

an Option in the loan agreement which gave rise to an embedded derivative, there remained

a derivative liability even after the Bond had been paid.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY13 FY14 FY15 FY16 FY17

N'm Figure 1: Operating performance

EBITDA Op. Profit NPBT


small release in FY16), on the back of trading volume

growth.

GCR notes that fuel trading is an inherently working

capital intensive business, reflecting very large sums, as

fuel shipments are secured and unsold in bulk. Thus, the

N4.6bn absorption in FY17 largely resulted from a

N16.2bn increase in receivables from crude sales, for

which customers generally have 30-days to settle.

Moreover, payments are usually being outstanding at the

end of the month. However, debtors pressure is generally

moderated by a corresponding, albeit smaller, trade

creditor with similar terms (N13.6bn at FY17). Once

Eterna receives payment from the off-taker, it remits to

NNPC the following day. Typically, these transactions are

concluded within the 30-day settlement period.

Per policy, three to six months’ stock is held in the

lubricants segment, based on feedback received from the

sales and marketing team. Similarly, more than three

months stock of refined petroleum products is kept at the

group’s storage facilities.

On the back of the large absorption, cash generated from

operations fell to a low N0.3bn in FY17 (FY16: N4.7bn).

No dividend payment was made in the four-year period to

FY15, with management preferring to retain cash for

working capital purposes. However, with the increase in

earnings reported over the last two years, a cumulative

N0.7bn dividend payment was made to shareholders.

With the group in an expansion phase, net expansionary

capex jumped to a high N1.7bn in FY17, with a

significant portion related to land acquisition and

buildings. Previous expenditure has been smaller and split

relatively evenly between maintenance requirements and

smaller expansion into trucks, plant and machinery, and

capacity at the lubes blending plant, as well as some

outlets. Given the weak cash generated, much of the

funding has derived from cash reserves.

Funding Profile

In line with the nature of the petroleum marketing

business, working capital assets have consistently

dominated the asset mix. Fixed asset growth has primarily

been aimed at providing the storage and distribution

facilities to facilitate this expansion. Current capacity at

the storage facilities is likely to be sufficient to cater for

project growth in volumes.

Short term assets comprising mainly oil inventories and

receivables, have accounted for an averaged 76% of total

assets over the review period (FY17: 83%). Receivables

more than doubled to a peak of N28.5bn at FY17 (60% of

total assets), mainly reflecting the greater quantum of

crude oil sales. This includes the N1.6bn being claimed

from the petroleum subsidy fund, but which is under legal

dispute. Similarly, inventory rose by 45% to N6.5bn at

FY17, representing 14% of assets.

Shareholder’s equity has increased steadily over the

review period, growing by 14% to N12.3bn at FY17,

mainly attributed to retained earnings. Trade and other

payables spiked by 130% to N24.5bn at FY17, comprising

around half of funding. The steep rise in payables reflects

the higher volume of trade, especially with regards to

crude sales. The bulk of the outstanding payment is due to

NNPC.

The most critical element in the crude trading business is

ensuring there is sufficient funding to meet working

capital requirements. As detailed earlier, creditors and

debtors are generally settled on 30 days terms, but there is

always a timing mismatch relating to the period the fuel is

stored between purchase and sales. Traders need to fund

this period through short term debt facilities or internal

cash, but given the large quantum of bulk fuel usually

traded, the funding requirements can be substantial. For

Eterna, short term credit facilities comprise primarily of

bank borrowings and relate to various Import and Export

Finance Facilities and local purchase facilities. These

credit facilities are secured by a lien on the products for

resale and on the group’s petroleum storage facility.

Table 7: Funding profile

(N’m) FY16 FY17 % diff.

ST Debt 5,840.7 7,228.7 23.8

LT Debt 1,213.5 619.2 (49.0)

Total Debt 7,054.2 7,847.9 11.3

Cash (7,117.1) (4,484.5) (37.0)

Net Debt (62.9) 3,363.4 (5,446.2)

Equity 10,814.6 12,291.7 13.7

Key ratios (%):

Total debt: equity 65.2 63.8 - Net debt: equity (0.6) 27.4 - Total debt: EBITDA 104.3 221.4 - Net debt: EBITDA (0.9) 94.9 -

As is evident in Table 8, Eterna enjoys access to a number

of banking counterparties, with the combined limit

exceeding USD500m. Most of these credit facilities are

available for use within a 12-month period, and are being

utilised to finance both import and export activities, with

maturities ranging from 30 to 150 days. Of this, up to

N10bn (around USD25m) has been drawn at a particular

point in time, mainly dependent on the requirements of the

Trading operations. Thus funding facilities appear to be

sufficient to meet financing requirements, even under

somewhat stressed scenarios. Management indicated that

the multiple lines with the different banks are in excess of

Eterna’s requirements, but the diversification of facilities

is important to ensure the most competitive rates can be

obtained. In addition, some of the credit facilities also

serve as enhancements to secure contracts.

Table 8: Credit facilities- (USD'm)

Counterparty Amount Tenor (days) Rate

UBA

200 120 n.a

120 30 30-day LIBOR + 10%

2.5 150 90-day LIBOR + 10%

25 90 90-day LIBOR + 10%

25 90 90-day LIBOR + 10%

Access Bank 20 60 n.a

120 360 21%

The long term borrowings represent outstanding balance

on a N0.5bn loan from the bank of Industry, expected to

be fully settled in June 2018, as well as a N2bn five-year

loan obtained from Sterling Bank (in 2016) for the

settlement of the derivative option


Aside from this, Eterna has been able to fund a large

portion of its trading activities from internal cash. To this

end, strong retained earnings saw cash holdings increase

substantially to N7.1bn at FY16. This cash was then

utilised to fund capex and trading activities during the

year, with the cash balance decreasing to N4.5bn at FY17.

The robust retained earnings, and by extension, cash

holding has served to curtail the impact of debt on

profitability.

In view of the above, gearing metrics have been reported

at relatively moderate levels over the review period. Gross

gearing marginally improved to 64% at FY17 and to 50%

at 1Q FY18, while, net gearing registered at 27%, from an

ungeared position previously. Net debt to EBITDA

registered at 95% at FY17, from an ungeared position, but

is well below the high of 184% in FY15.

Outlook, Forecasts and Year-to-date performance

Given the volatility and the low margins associated with

the Trading segment, management’s focus is to expand

capacity in other revenue segments in order to enhance

growth in profitability. Nevertheless, receipts from

Trading activities would still comprise a sizeable portion

of total revenue over the medium term.

In the retail segment, Eterna plans to rapidly escalate the

number of outlets to around 200 over the next five years.

This will be achieved through new constructions,

acquisitions (of existing outlets) and franchise

arrangements in strategic cities around the country. As at

June, around seven new retail outlets had become

operational, bringing the current count to 19. In this

regard, Eterna projects to increase volumes traded in PMS

to 543m litres in FY18 (FY17: 477m litres), subsequently

growing to 803m litres in 2021. With similar increases

expected in other fuel products (AGO and HHK), its

market share is anticipated to rise above five percent by

2022. Growth in volumes will also be supported by the

optimisation of operations at the outlets to render 24-hour

service. Accordingly, revenue is expected to more than

double over the next few years, with noticeable

improvements expected in profitability, as benefits from

economies of scale kick in.

Furthermore, with increasing demand for liquefied

petroleum gas, the Company intends to explore growth

opportunities in this segment by increasing investments

across the entire natural gas value chain. The retail

stations would readily serve as outlet for the sale of LPG

when it eventually comes on stream.

Given the higher margin potential in the Lubricant and

Chemical segment, management plans to expand the

distributorship network, in order to increase availability

and enhance accessibility to both Eterna and Castrol

branded lubricants across the country. This will help to

increase volumes of non-fuel products, with an average of

5% annual growth being targeted over the next couple of

years. This will be supported by improved customer

relationship management, service efficiency, and value-

add by offering more technical support and after sales

services. The Company also plans to expand the current

blending capacity at the Sagamu plant, as well as

obtaining OEM6 certification for Eterna branded

lubricants.

With the contribution from crude trading expected to

reduce (given uncertainties with regards to timing, pricing

and volumes traded), revenue is projected to remain flat at

N176bn in FY18. Fuels will likely account for over half of

this, but as more retail outlets come on stream over the

medium term, and as the various market penetrating

activities materialise, revenue from fuels, lubricants and

chemicals would comprise a more significant portion of

revenue, with crude trading only playing a complimentary

role in revenue generation.

In line with trend, the revenue forecast indicates cost of

sales would remain high, registering around 90% of

revenue in FY18. As a consequence, profit margins are

expected to remain low in FY18, however, as benefits

from scale and higher traded volumes materialise over the

medium term, profitability is expected to improve, with

the EBITDA margin rising above 10% by FY21.

Table 9:

Performance

(N’m)

Actual

1Q FY17

Actual

1Q FY18

FY18

Forecast

%

Achvd.

Revenue 51,960.6 54,332.5 175,854.3 30.9

EBITDA 1,119.2 852.9 4,545.9 18.8

Depreciation (92.5) (85.3) (426.1) 20.0

Op. Profit 1,026.7 767.6 4,119.8 18.6

Net interest (115.7) (103.5) (290.6) 35.6

Forex (loss)/gain 91.2 87.1 0.0 n.a

NPBT 1,002.2 751.2 3,829.2 19.6

Key ratios (%):

EBITDA margin 2.2 1.6 2.6 -

Op. Margin 2.0 1.4 2.3 -

Net int. cover (x) 8.9 7.4 14.2 -

As at 1Q FY18, revenue of N54.3bn (1Q FY17: N52bn)

registered around a third of full FY18 budget, as some

new retail outlets became operational. Earnings margins

were narrower than anticipated, largely reflecting the

impact of rising global crude prices on trading activities.

However, management anticipates that the positive impact

from new outlets, combined with increased sales of

lubricants, will see profitability improve by year end.

Eterna plans to raise around N40bn in debt over the next

three years to finance a number of capex projects,

necessary to ensure projected earnings growth

materialises. Thus, although gross debt reduced to N6.3bn

at 1Q FY18, it is projected to climb steeply over the

medium term. While this could place some pressure on

gearing metrics, the strong growth forecasts are

considered in light of the improved Nigerian operating

environment and the relative price inelasticity for

petroleum. However, if projected revenue growth does not

materialise, Eterna could be saddled with a very high debt

burden, especially considering the riskiness of the trading

business. Ultimately, achieving set targets, on time and

within budget, will be dependent on the capacity to access

needed funding, as well as the impact regulation and

policy changes have on demand.

6Original Equipment Manufacturer


Eterna PLC (Naira in Millions except as Noted)

IFRS

Statement of Comprehensive Income- 31 December

2013 2014 2015 2016 2017 1Q2018*

Turnover

98,296.9 82,330.2 92,065.4 106,887.6 173,030.2 54,332.5

EBITDA

1,818.0 2,199.5 1,531.8 6,764.1 3,544.1 852.9 Depreciation & Amortisation

(265.6) (272.4) (325.2) (340.0) (381.0) (85.3)

Operating income

1,552.4 1,927.0 1,206.6 6,424.1 3,163.1 767.6 Net finance charges

(741.8) (363.3) (509.8) (3,427.9) (393.4) (106.7)

Foreign Exchange (loss)/gain

105.9 53.4 212.5 257.4 13.6 87.1 Other operating income/(expense)

152.9 174.9 397.3 (853.4) 29.6 3.1

NPBT

1,069.4 1,792.1 1,306.6 2,400.2 2,812.9 751.2 Taxation paid

(366.2) (502.5) (28.5) (922.6) (811.0) (240.4)

Profit from continuing operations

703.2 1,289.6 1,278.1 1,477.6 2,001.9 510.8 Net income 703.2 1,289.6 1,278.1 1,477.6 2,001.9 510.8 Other comprehensive loss/gain 10.4 19.9 (13.9) (7.6) (21.8) 0.0 Total Comprehensive Income 713.6 1,309.5 1,264.1 1,470.0 1,980.1 510.8

Statement of cash flows

Cash generated by operations

2,082.4 2,709.8 2,512.4 7,712.5 5,402.8 1,310.7 Utilised to increase working capital

2,795.8 1,643.8 (4,490.7) 134.4 (4,636.2) (238.3)

Finance charges/interest paid

(741.8) (52.1) (213.0) (3,062.3) (59.4) (32.4) Taxation paid

(135.6) (184.0) (180.6) (114.3) (421.4) (61.8)

Cash flow from operations

4,000.8 4,117.5 (2,371.9) 4,670.4 285.8 978.2 Maintenance capex‡

0.0 (272.4) (325.2) (340.0) (236.2) 85.3

Discretionary cash flow from operations

4,000.8 3,845.0 (2,697.1) 4,330.3 49.6 1,063.5 Dividends paid

0.0 0.0 0.0 (326.0) (391.2) 0.0

Retained cash flow

4,000.8 3,845.0 (2,697.1) 4,004.3 (341.7) 1,063.5 Net expansionary capex

(231.2) (11.0) (60.9) (356.1) (1,651.0) (434.6)

Investments and other

0.0 (114.7) (84.1) (49.4) (322.6) (0.2) Proceeds on sale of assets/investments

0.3 0.0 0.0 0.0 22.6 3.6

Shares issued

0.0 0.0 0.0 0.0 0.0 0.0 Cash movement: (increase)/decrease

(325.9) (2,073.6) 824.5 (5,268.6) 2,632.6 2,412.6

Borrowings: increase/(decrease)

(3,444.1) (1,645.7) 2,017.5 1,669.8 (339.9) (3,044.9) Net increase/(decrease) in debt

(3,770.0) (3,719.3) 2,842.0 (3,598.8) 2,292.7 (632.3)

Statement of financial position

Ordinary shareholders interest

7,110.6 8,409.5 9,676.7 10,814.5 12,291.6 12,807.3 Outside shareholders interest

0.1 0.1 0.1 0.1 0.1 0.1

Pref shares and conv debentures

0.0 0.0 0.0 0.0 0.0 0.0 Total shareholders' interest

7,110.7 8,409.6 9,676.8 10,814.6 12,291.7 12,807.4

Current debt

2,146.6 1,824.3 4,512.8 5,840.7 7,228.7 5,224.5 Non-current debt

1,089.9 328.8 152.2 1,213.5 619.2 1,119.6

Total interest-bearing debt

3,236.5 2,153.1 4,665.1 7,054.2 7,847.9 6,344.1 Interest-free liabilities

7,906.0 7,993.7 14,216.0 13,807.7 27,780.8 24,587.3

Total liabilities

18,253.1 18,556.3 28,557.9 31,676.5 47,920.4 43,738.8 Property, Plant and Equipment

6,188.8 6,058.9 5,867.8 5,974.0 7,255.2 7,448.6

Investments and other non-current assets

215.0 383.2 530.5 644.5 900.9 938.5 Cash and cash equivalent

599.4 2,673.0 1,848.4 7,117.1 4,484.5 2,071.9

Other current assets

11,249.9 9,441.2 20,311.1 17,940.9 35,279.7 33,279.8 Total assets

18,253.1 18,556.3 28,557.9 31,676.5 47,920.4 43,738.8

Ratios

Cash flow: Operating cash flow : total debt (%)

123.6 191.2 neg 66.2 3.6 61.7

Discretionary cash flow : net debt (%)

141.6 n.a neg n.a 1.5 99.6 Profitability:

Turnover growth (%)

9.7 (16.2) 11.8 16.1 61.9 25.6 Gross margin (%) 2.9 4.1 3.3 8.0 3.7 2.5 EBITDA : revenues (%)

1.8 2.7 1.7 6.3 2.0 1.6

Operating profit margin (%)

1.6 2.3 1.3 6.0 1.8 1.4 EBITDA : average total assets (%)

7.2 13.1 7.2 26.4 10.4 8.0

Return on equity (%)

10.4 16.6 14.1 14.4 17.3 16.3 Coverage:

Operating income : gross interest (x)

2.1 5.0 2.3 1.8 5.9 6.6 Operating income : net interest (x)

2.1 5.3 2.4 1.9 8.0 7.2

Activity and liquidity:

Trading assets turnover (x)

15.4 19.9 17.0 14.5 19.0 0.0

Days receivable outstanding (days)

61.9 31.1 49.1 54.5 44.2 0.0 Current ratio (:1)

1.3 1.4 1.2 1.4 1.2 1.2

Capitalisation:

Net debt : equity (%)

37.1 n.a 29.1 n.a 27.4 33.4

Total debt : equity (%)

45.5 25.6 48.2 65.2 63.8 49.5 Net debt : EBITDA (%) 145.1 neg 183.9 neg 94.9 125.2 Total debt : EBITDA (%) 178.0 97.9 304.5 104.3 221.4 186.0

‡ Depreciation used as a proxy for maintenance capex expenditure *Unaudited numbers


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