KenolKobil Ltd announced their audited results for the period ended 31st December 2014 on 25th March 2015:
RECOMMENDATION: HOLD/LONG TERM BUY, Fair Value – 10.91 (8.56% Upside)
Alternative Top Line Strategy: 17% Dip in Net Sales to KES 91.32 Billion Resulting in 18.44% Rise in Gross Profit to KES 5.05 Billion
True to their turnaround strategy initiated in 2012, KenolKobil continues to sacrifice aggressive sales volumes in favor of increasing gross profit margins which stand at 5.53% (3.89% FY13). Despite price controls in Kenya dictated by the Energy Regulatory Commission (ERC) and a downstream industry plagued by slim margins, Kenol has managed to squeeze out competitive returns owing to a better corporate structure, strengthening of management and systems in regional subsidiaries and a strategic focus on high margin business segments.
Positive Impact of Changes in Operations: EBITDA growth of 23.80% to KES 3.77 Billion, 27.35% climb in EBIT to KES 2.79 Billion
Facilitated by a 14.43% ease in direct operating expenses to KES 2.24 Billion (KES 2.62 Bn FY13), EBITDA margins improved to 4.13% from 2.78% previously while the operating profit margin was upped to 3.06% (2.00% FY13). Furthermore, on operations, the strategic shift to a short term inventory management system resulted in a slight reduction of the calculated cash conversion cycle to 40 days (41 days FY13), while alleviating pressure on short term debt requirements to manage working capital evident by the KES 4.88 Billion debt pay down. This enabled 21.97% reduction in net interest expense to KES 1.27 Bn in addition to; negotiating of lower borrowing costs and the reduction in international oil prices which reduced overall debt requirements. However, the company remains in a negative working capital position of KES 810 Million (KES 1.36 Bn FY13) at a current ratio of 0.95x. Effective use of operating leverage shall continue to enable the company to amplify operating margins going forward as observed in FY14 performance.
Surge in Bottom Line Performance: Pre-tax Earnings shot up 169.69% to KES 1.52 Billion while PAT jumped 95.42% to KES 1.09 Billion
The net income margin stands at 1.20% (0.51% FY13) in line with similarly low industry averages. Shareholder returns (ROE) on the other hand spiked to 15.59% from 8.52%. Proposed DPS doubled to KES 0.20 per share yielding 1.99% at current prices with the dividend payout ratio flat at 27.03%. Book closure for dividend payment is set for 7th May 2015 with payment on or about the 5th of June 2015. The counter is currently trading at marginally high multiples at a P/e of 13.6x and p/b of 2.02x against the listed petroleum sector average of 13.0x and 1.59x respectively that does not suggest gross mispricing.
Outlook: We applaud KenolKobil management for consistent execution of their turnaround strategy displayed in the company’s improving financial performance. The organization is well positioned to support organic growth supported by initiatives especially among regional subsidiaries where KenolKobil’s market share is more dominant. The group took over 37 new service stations in 2014 to support further growth. Anticipating relatively low international oil prices will be sustained over 2015; positive opportunities lie in improving margins by focusing on lowering financing costs by reducing net borrowing. We portend that improvement in the companies’ financial fortune is sustainable in 2015 in addition to a speculative bias on stock trading for a possible takeover bid as Kenol exhibits a much stronger balance sheet compared to the period when such an attempt was previously made by Puma energy in 2012.