Is NGX debutant, Aradel, a good buy?

Aradel came on the Nigerian Exchange (NGX) with a market capitalisation of over N3 trillion. In one day, it towered above Seplat Energy to become the largest oil and gas stock listed on the exchange.

In less than 24 hours of listing, the stock appreciated by 17 percent, with its share price hitting N820. However, is the enthusiasm warranted? Are the company’s fundamentals sufficient to sustain this boom?

The stock proves an excellent buy for investors, after appreciating by over 2000 percent on the NASD in one year. Aradel is the first listed entity on the NGX to own a refinery. It also owns oil wells with production capacity of over 13,000 barrels per day, and it is recording consistent revenue growth due to rising oil prices.

In, 2023, Aradel Holdings posted a N221.1 billion revenue, marking a 235 percent growth from N66.1 billion revenue posted in FY 2022. Gross profit grew to N147.9 billion, marking a 250 percent growth from the N42.3 billion recorded in FY 2022.

For a proper view, the stock’s fundamentals have to be weighed against contemporaries, Seplat Energy Plc and Oando Plc.

The most common metric for assessing a stock’s potential is price-to-earnings ratio (P/E). Based on this metric, Aradel Holdings has a P/E ratio of 34.12x, when compared to Seplat’s 55.23x. This suggests that investors place a higher premium on Seplat. Oando’s 12.52x P/E ratio is not surprising considering the company is yet to release an audited financial statement for two years.

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For oil and gas stocks, the generally capital-intensive nature of their business makes price-to-book ratio (P/B) a better assessment metric. Among these three stocks, Oando Plc posted the lowest P/B with -4.08, followed by Aradel’s 2.96, and Seplat’s 1.17.

Aradel’s P/E suggests that investors are willing to pay N34 for every naira of the company’s earnings. Despite Oando’s impressive 600 percent appreciation this year, data suggests that investors do not assign the same level of value to Oando as they do to Seplat and the new entrant, Aradel.

In understanding the value ascribed to Aradel, it is important to make a comparative analysis of the company’s financial performance.

In FY 2023, Oando Plc posted the highest revenue among the three with N3.4 trillion, followed by Seplat Energy with N697 billion, and Aradel with N221.1 billion. However, in terms of gross margin, Aradel topped with a gross margin of 67 percent in 2023, as Seplat posted a 50 percent during the same year, with Oando posting a 2 percent gross margin. Also, Aradel towers above its contemporaries in terms of net profit margin (NPM) of 24 percent recorded in FY 2023. In contrast, Seplat recorded an NPM of 12 percent, while Oando posted an NPM of 2 percent.

Such a high NPM for Aradel suggests that is a more efficient operator than its contemporaries. Despite recording a net loss of N5.6 million in its gas production, the company’s margins were helped by its refined products.

In the first half of 2024, Aradel’s NPM surged up to 39 percent, in contrast with Seplat’s 12 percent. Aradel posted a net profit of N104.4 billion, in contrast with Seplat’s N68.1 billion net profit recorded during the half-year.

In terms of return on equity (ROE), Aradel Holdings posted an ROE of 10 percent in 2023, while Seplat posted an ROE of 7 percent. For Aradel, it was an appreciation from 2022’s 5 percent, while for Seplat, it was an appreciation from 2022’s 6 percent. During H1 2024, Aradel’s ROE rose to 11 percent, while for Seplat, it was around 3 percent.

Aradel also sweated its assets the most in FY 2023 as well as H1 2024, generating a return on assets (ROA) of 6 percent in FY 2023, in contrast with Seplat’s 3 percent and Oando’s 2 percent. Aradel also hit an ROA of 7 percent in H1 2024, while Seplat hit an ROA of 1 percent.

Judging from its financial performance, Aradel Holdings shows significant growth potential, especially when compared to its competitors, Seplat and Oando. Although, investors are placing a higher premium on Seplat, considering the company’s dividends history since listing on the NGX, Aradel is demonstrating robust financial health, which is expected to translate into returns for shareholders in the coming years.