Stock Watch: Total Kenya Limited

Total Kenya Ltd (NSE: TOTL), released their half-year results for the period ended 30th June 2015, with the following highlights:

• Total Kenya Limited registered a 29% decline in gross sales; worsened by a 9% increase in indirect taxes and duties that resulted in KES. 55Bn net sales, down 33% from the previous year.

• The sales volumes slump was due to lower bulk sale to other oil marketing companies, whereas net sales was hindered by a drop in international oil prices. Gross profit failed to recover, posting a minimal 5% decline to KES. 3Bn, despite a 34% decline in cost of sales.

• Analogous to economic conditions and the local exchange rate, foreign exchange rate losses soared by 352% to KES. 191Mn.

• Coupled with a 2% increase in operating costs, profit for the period was heavily weighed on, resulting in the oil marketer recording a 17% decline to KES. 525Mn; despite a 149% increase in finance income, as a result of positive cash position in Kenya shillings.

• Amongst sector financial indicators, effective cash management was not only illustrated by cash generated in financing activities but a 680% increase in cash and cash equivalent at the end of the period. The oil company extends signs of a strong performance as the cash generated from operations increased significantly by 205% to KES. 11Bn, under consideration that inventories decreased by a meagre 14% to KES. 9Bn.

Recommendation

We maintain a HOLD recommendation for Total Kenya, with a target price of KES. 21.95; extending an upside potential of 4%. Market conditions in support of a worsening outlook for Total include, the company losing 1.5% of its market share to fringe rivals; combined, the top three oil marketers lost 4% of their market share.

Increased indirect taxes and duties coupled with foreign exchange losses, expected to increase in the near future, bolsters our prediction that profit after tax will remain suppressed- despite increments in profit margins- and thus our recommendation.

Key financial ratios read as expected and in-line with industry trends; a decline in the P/B ratio, reflective of current market conditions, whilst oil marketers increase gross profit- and profit before tax margins. However, a higher than industry P/E ratio- particularly while industry peers see theirs decrease- could be translated to the assumptions that the stock stands a higher chance of a further market correction.