In 2023, Conoil Plc’s share price surged by an impressive 217% year-to-date, closing at N83.90 per share.
The bullish trend continued into early 2024, with the stock gaining 8.34% in Q1 and extending its run with a year-to-date gain of 25.15% by mid-year.
From its 5-year low of N13.15 on September 4, 2020, the share price has climbed to N105 as of the close of trading on July 2, 2024.
These impressive share price gains suggest strong investor confidence and positive market perception of Conoil’s financial health and prospects.
However, it is crucial to evaluate whether the current share price is appropriately valued or supported by its fundamentals.
The company has released its full-year 2023 and Q1 2024 results, showing that pre-tax profit in 2023 grew by 99%, followed by another 50% YoY growth in Q1 2024.
A cursory review of the company’s financials shows that the growth in profitability is buoyed by impressive growth in revenue and exchange gain, especially in the 2023 full year.
Revenue and profitability analysis
Conoil reported a 53% year-over-year revenue growth to N201 billion in 2023, and by Q1 2024, it has already achieved 45% of the 2023 revenue, reaching N91 billion.
This strong start to 2024 indicates a positive trajectory for the company’s future, suggesting continued growth and the potential for exceeding previous revenue benchmarks.
If this momentum continues, Conoil is well-positioned to achieve substantial revenue growth in 2024.
A deeper look into the revenue segments reveals that white products continue to account for a significant portion of revenue, about 96%, up from 92% in 2022. While this indicates a strong market for Conoil’s core products, it also suggests a high dependency on a single revenue stream.
The company’s cost of sales has continued to soar. It grew by 54% YoY to N182 billion in 2023 and further escalated by 181% YoY in Q1 2024, reaching N82 billion.
This increase led to a decline in gross profit margin to 9.85% from 10.66% in 2022.
This indicates that while the company is growing, it is also facing increased costs that are impacting profitability, reflected in the narrowing gross profit margin, and thus highlights the need for effective cost control to be able to sustain profitability.
Financial health and risk
Conoil’s total debt in 2023 stood at N32 billion, about 50% of its current liabilities, representing a 254% increase from N5.7 billion in 2022.
Despite this significant rise in debt, the company managed to cover its interest expenses, as evidenced by the improvement in its interest coverage ratio to 7.3x in 2023 from 5.19x.
This indicates Conoil’s enhanced ability to meet its interest obligations. However, the substantial increase in leverage could pose a risk if not managed prudently, even though it boosted the return on equity to 29.78% in 2023 from 19.8% recorded in 2022.
Notably, total debt dropped by 38% to N19.8 billion as of Q1 2024, which reduced its leverage ratios.
Valuation analysis
Conoil’s financial strength is further highlighted by its reported strong earnings per share (EPS) of N14.22 in 2023 and N6.25 in Q1 2024, resulting in a trailing twelve-month EPS of N15.80.
With this, the stock is trading at a price-to-earnings (P/E) ratio of 6.65x, which is significantly below the sub-sector average of 16.57x.
The strong EPS and low P/E ratio suggest that Conoil’s stock might be undervalued relative to its peers, presenting a potential investment opportunity.
Additionally, the stock appears cheap relative to its revenue as reflected in its low price-to-sales ratio of 0.28x.
Based on the current valuation, earnings growth, revenue performance, debt reduction, return to shareholders, and consistent dividend payments, Conoil presents a compelling investment opportunity, especially as it is trading below its 52-week high.
The company has proposed a dividend of N3.50, which is about a 40% YoY increase in dividend per share for the 2023 financial year. This increase in dividends will enhance the overall total return for shareholders.
While Conoil’s financial metrics and proposed dividend increase paint a positive picture, investors should carefully consider the associated risks, particularly the rising cost of sales and narrowing profit margins.
These factors could impact on the company’s ability to sustain its current level of profitability and growth.
Thorough due diligence is necessary to evaluate Conoil’s potential as a long-term investment, balancing the opportunities with the potential risks.
