Performance: Margins continue to shrink

• The company’s revenue increased by 64.9% y/y to GHS 2.4b, owing primarily to increases in fuel prices
• TOTAL’s ex-pump prices for petrol and diesel increased by 78.6% and 103.5%, respectively, in 1H2022. This increase was mainly driven by a 56.7%* increase in global crude oil market price and a 16.9%* depreciation of the Cedi against the Dollar in 1H2022
• The rise in global crude oil prices was exacerbated by the Russia-Ukraine conflict, as Russia is the world’s second-largest exporter of crude oil. Furthermore, OPEC’s decision to reduce its oil output in response to global happenings caused some bottlenecks in oil production and supply amid the soaring demand, putting upward pressure on prices
• Despite the growth in revenue, gross profit margin decreased by 3.7pp y/y to 7.4% in 1H2022. This is as a result of weak sales volume growth (+3.4% y/y from January to May 2022*) and higher cost of sales (+71.7% y/y)
• Cost of sales represented 92.6% of revenue in 1H2022, compared to a 3-year average of 88.2%. This reflects the rising inflationary pressures experienced in 1H2022, characterized by supply chain bottlenecks, disruptions in global energy markets, shipping and transportation constraints
• Furthermore, operating costs increased by 27.4% y/y to GHS 123.5m, dragging the operating margin down by 2.4pp y/y to 3.3%
•  Consequently, the net profit margin contracted by 1.9pp y/y to settle at 2.3% in 1H2022

Outlook: Volume growth is expected to be neutral to bearish

• Given that TOTAL’s pricing is among the top 3 highest in the market, we are gloomy about the OMC’s sales volume in the near term. Our thesis is hinged on our view that the global and country macro scenarios will prevail throughout the year. As a result, we expect consumers to remain price-sensitive, switching to OMCs with relatively cheaper prices
• With neutral to bearish sales volume growth, coupled with the prevailing inflationary pressures, we expect TOTAL’s margins to compress further
• We have observed that TOTAL’s pricing has been moving farther away from the market average. In January 2022, it was 1.7% higher than the market, but in June 2022, it rose to 6.1% higher. This signals to us that TOTAL’s strategy is to adjust its prices higher to align with global crude oil pricing and rely on its brand and customer loyalty to drive sales amid soaring fuel prices
• In our view, this strategy will be enough to keep earnings afloat but not enough to expand margins

Valuation: Under Review 

• TOTAL is currently trading at a P/E of 8.1x and EV/EBIT of 6.8x
• We are in the process of re-initiating coverage on TOTAL and have therefore placed our recommendation under review