Meristem analysts ask investors to ‘hold’ Ardova stocks amid proposed buy-out
Recently, Ardova Plc notified the investing public of the intention of its majority shareholder, Ignite Investments and Commodities Limited to buy-out other shareholders in the company at an offer price of N17.38 per share.
Thereafter, Ardova will delist its shares from the Nigerian Exchange Limited (NGX) upon completion of the process.
Since the buy-out announcement, “Ardova share price has been on a losing streak, accumulatively shedding 8.15percent so far in 2023. Also, we note that the company does not have an history of dividend payment to shareholders,” said Meristem research analysts who also advised a Hold for existing investors and cautious trading for intending investors.
“While the company’s Board is still deliberating on the offer, the stock is currently trading at N16.90 (as of February 15), which is 8.47percent premium over our 2023 target price of N15.58. In addition, the proposed offer price of N17.38 represents a premium of 11.55percent to our target price,” the analysts added.
Ardova has a total of 1.31 billion units of issued share capital, of which 74.06percent (970.67 million units) are held directly by Ignite Investments and Commodities Limited (through Abdulwasiu O. Sowami, a member of the Board of Directors). The remaining 25.94percent (339.96million shares) represents the company’s free float.
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The offer price represents a discount
of 1.53percent to the price (N17.65) on the date of announcement and a 25.04percent premium to the price on November 30, 2022 (the last trading day before the Offer).
“After a successive decline in the share price in four consecutive years (2018 2021), Ardova recorded a significant uptick (41.54percent year-on-year) in its price in 2022, most of which occurred between November and December when the entire equities market had a bulish outing”.
In their recent note to investors, Meristem research analysts noted that Ardova revenue grew at a compounded annual growth rate (CAGR) of 6.18percent between 2016 and 2021.
“As per the company’s most recent financial statement (2022FY unaudited), revenue increased by 19.55percent year-on-year (YoY) to N240.81billion, due to revenue growth across segments. The revenue growth is attributable to the surge in price of petroleum products during the year. For context, the average price of
PMS and 5kg LPG increased by 24.38percent YoY and 27percent YoY to N206.19 per litre and N4,565.56, respectively in 2022.
“The downstream industry is characterised by high cost of sales (industry cost to
sales ratio averaged circa 92percent in the past five years).
“Reflecting that, Ardova’scost to sales ratio averaged 92.06percent during the same period. However, the firm’s cost to sales ratio was lower in 2022 (94.21percent in 2022FY, versus 95.11percent in 2021FY), due to the faster growth in revenue reletaive to direct cost.
“Thus, the company grew it’s gross profit by 41.70percent YoY to N13.96billion and gross margin inched higher to 5.80percent in 2022FY.
“However, the increase in gross profit was eroded by the 87.01percent YoY increase in
operating expenses, resulting in an operating loss of N2.50billion. The sharp increase in operating expenses was driven by the jump (circa183percent) in expenses from the fuel segment (major driver for revenue growth).
Furthermore, high finance costs added more pressure on bottom-line performance as the company’s profit after tax declined by 49.41percent YoY to -N7.61billion in 2022FY,” Meristem analysts said.