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Reduced sales, high finance cost send Eterna into loss in 2019

Eterna Plc last week announced its audited financial statement for the year ended December 31, 2019 and indication showed the company must urgently reverse the trend to remain competitive within the downstream market.  This is necessary because the analysis of its revenue sources showed mixed results in that the gains from lubricants, fuel and other market segments were cancelled out by losses in the trading segment.

The overall sales fell by 9 percent from N251.9 billion in 2018 to N229.3 billion in 2019, no thanks to a 15 percent decline in trading revenue in 2019. Eterna has four revenue segments which are trading, fuel, lubricants, and others.

Trading segment represents the bulk importation and sale of fuels to off-takers which include PMS, AGO, DPK, base oil, bitumen, and LPFO. It also involves the lifting and sales of crude oil. Trading revenue accounted for 77 percent of its total revenue in 2018 and 72 percent in 2019. Consequently, the company’s trading revenue fell to N164.1 billion in 2019 from N193.7 billion in 2018.

The fuel segment recorded a 5 percent growth, and that was instrumental in this segment’s revenue accounting for 23 percent of the company’s total sales in 2019 compared with 20 percent in 2018. In naira terms, it rose to N53.6 billion last year up from N50.9 billion in 2018.

Revenue from lubricants surged by 55 percent to N8.96 billion in 2019 whereas from the same segment Eterna generated N5.79 billion in 2018. Its share of the total revenue went up to 4 percent as against 2 percent in the previous year.

Earnings classified as ‘other revenue” witnessed the highest growth rate of 71 percent, moving from N1.5 billion in 2018 to N2.55 billion in 2019. Notwithstanding the increase from this revenue segment, it only accounted for just one percent of the company-wide sales.

In effect, the operating profit fell by 44 percent to N1.56 billion last year, which was a significant drop in profitability for a company that realised N2.78 billion as operating profit in 2018.

This follows that it made a loss and the loss after tax was N144.3 million in 2019, in contrast to a profit after tax of N1 billion in 2018.  BusinessDay Research and Intelligence Unit (BRIU) further probed why Eterna made a loss after tax in 2019 through a deeper dive into its audited financial statement for last year.

The loss could be pinned down to a number of factors based on our analysis. The firm has not been able to reduce its cost of sales significantly. In 2018, Eterna incurred N247.2 billion as its cost of sales which translated to 98 percent when expressed as a percentage of the turnover.

“We saw it coming. Eterna’s cost to sales is too high. It is not sustainable where you spend about 99 percent of your earnings to make sales. In addition, the trading revenue constitutes the bulk of its earnings, but the model adopted here wherein the company leases almost all the equipment through farm out arrangement for this segment operation is not helping the financial position of the firm”, an energy analyst who preferred anonymity, said.

“Save for the gradual improvement in the prices of crude oil, Covid 19 might have further crippled the firm’s operations”, the analyst added.

Eterna spent N224.3 billion in 2019 as cost of sales, and looking at the nominal value, last year’s cost of sales amounted to a 9 percent reduction when compared with the previous year’s cost of sales. Intrinsically, nothing has changed because the 2019 cost of sales relative to that year’s revenue also amounted to 98 percent, which effectively means that Eterna Plc expended N98 to generate N100 revenue in both years.

The general and administrative expenses recorded a 4 percent increase partly coming from increase in staff costs which were N885 million in 2019 as against N797 million in 2018; depreciation cost which rose to N593 million in 2019 from N387 million in 2018; rent, travelling and entertainment cost which was N323 million in 2019 compared with N138 million in 2018, as well as repairs and maintenance cost that rose to N337 million from N198 million in 2018.Another factor is finance cost. It surged by 92 percent during the period from N869 million in 2018 to N1.69 billion last year.

Eterna Plc’s share price closed last week Friday at N2.67 per share representing a price depreciation to the tune of 25.8 percent year to date.

With Covid 19 ravaging economies of the world, Eterna management needs to think outside the box for a turnaround.

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