Tax Credit Saves Oando’s Profit In 2nd Quarter
Oando Plc reaped a windfall of N28.6 billion in tax credit in the second quarter ended June 2019, saving the company from hitting a big loss at half year. The tax credit provided a bridge for the energy company to cross over from a huge pre-tax loss to an after tax profit during the review period. This has kept investors wondering if it can sustain profit growth for the fourth year running.
A tax expense of over N4 billion in the first quarter suddenly turned into the huge tax credit in the second quarter, leading to a net tax credit of over N24 billion at half year. That provided the money with which the company was able to pay its interest expenses of over N21 billion and absorb its share of associate loss of close to N2 billion.
Of the company’s turnover of over N315 billion at half year, only N1.2 billion filtered into operating profit – practically nothing in the face of the huge finance expenses. This is despite a reversal of asset impairment charge that added N10.6 billion to gross profit. The profit the company is showing for the period is an addition of the balance of tax credit after interest expenses and a finance income of N4.6 billion.
A sudden turn from an after tax profit of N4.6 billion in the first quarter to a pre-tax loss of over N17 billion in the second quarter is explained by an upsurge in administrative cost. Administrative expenses multiplied more than three and half times between March and June 2019. The company’s group chief executive officer, Mr. Wale Tinubu, said the swelling came from a one-off charge of N14 billion.
Group turnover amounted to N315.41 billion for Oando at the end of half year operations in June 2019. That is a year-on-year increase of 6 percent, a slowdown from close to 12 percent growth in the first quarter. Tinubu said it was a strong topline performance driven by increases of 15 percent in crude oil production and 8 percent in natural gas output.
The year-on-year revenue growth is expected to slow down further to about 5 percent at full year. Full year turnover is projected at N716 billion for Oando in 2019. This means a sharp slowdown is to be expected from the top record revenue growth of 36.6 percent in 2018.
Input cost is high and yet growing relative to turnover from 83 percent at the same time last year to 87 percent at half year 2019. Cost of sales grew well ahead of turnover at 11 percent to N273.5 billion at the end of half year operations compared to the 6 percent increase in turnover.
Rising input cost is hurting gross profit margin, resulting in a drop of 18 percent in gross profit to about N42 billion at the end of June 2019. The drop was remedied by a shift from an impairment charge on assets of N6.72 billion in the same period last year to a reversal of N10.62 billion at half year 2019.
However an upsurge of about 66 percent in administrative expenses to N53.7 billion could not be remedied. It was the singular development in the second quarter that consumed the profit the company posted in the first quarter and created a pre-tax loss of over N17 billion at the end of June 2019. Administrative cost multiplied more than three and half times from N14.6 billion at the end of the first quarter.
The effect of the massive cost increase is a crash of operating profit from over N17 billion in the first quarter to N1.2 billion at the end of the second quarter. It was also a fall of 91.5 percent year-on-year from an operating profit of almost N14 billion in the same period last year.
The problem was that the company had to look elsewhere for money to settle finance charges in excess of N21 billion at the end of June 2019. A finance income of N4.6 billion reduced the net finance expenses to N16.7 billion and share of loss of associates added to the figure to create a pre-tax loss of N17.3 billion at the end of half year operations.
A windfall of N24.4 billion from tax credit provided a bail-out that turned the pre-tax loss into an after tax profit of N7.2 billion for Oando at the end of half year trading in June 2019. That still represents a drop of 15.5 percent in after tax profit year-on-year.
The full year profit outlook for the company is uncertain, as the half year profit is rooted outside the company’s normal course of operations. Improving sales revenue isn’t flowing down to profit, the strength to rebuild operating profit in the second half is doubtful and huge finance expenses remain a major hurdle for revenue to flow down to the bottom line.
The company’s chief executive said management is cutting balance sheet borrowings but this is yet to translate to reduction in interest expenses. Profit performance swings widely across quarters and between years. The company closed the first half of last year with an after tax profit of N8.5 billion but closed the year with an after tax profit of close to N29 billion.
Notwithstanding the volatility, Oando has sustained profit recovery for the past three years since it returned to profit in 2016. Can it sustain profit growth for the fourth year running is the question mark on the company’s earnings outlook this year.
The company closed the half year operations with earnings per share of 29 kobo, increasing from 24 kobo in the same period last year. The increase reflects an increase in profit attributable to equity holders of the parent company. The company ended last year’s operations with earnings per share of N1.97. It has not paid any dividends since the 30 kobo per share it gave out for the 2013 operations.
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