Eterna Oil recently released its Q2 2024 results, and the figures have not met investor expectations.
The company missed key performance targets, raising concerns about its ability to meet future expectations.
However, despite these disappointing results, the company’s share price has continued to rise, achieving a year-to-date gain of 83.39% as of August 27, 2024, following a 107% gain in 2023.
Eterna Oil’s share price is rising despite facing losses and missing its Q2 forecast, the following factors have undoubtedly contributed to the rise,
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Strategic Initiatives: The company is implementing a five-year corporate plan aimed at expanding its presence in Nigeria’s downstream oil and gas sector1.
Market Confidence: Investors may have confidence in the company’s long-term vision and strategic direction, which includes acquiring additional retail outlets and maintaining high operational standards.
Competitive Edge: Eterna Oil’s local knowledge and ability to operate effectively in Nigeria’s challenging environment give it a competitive advantage.
These factors contribute to positive investor sentiment, driving the share price up despite short-term financial setbacks.
Revenue Growth with a Caveat:
Eterna Oil’s Q2 2024 revenue grew by 109% year-on-year (YoY) to N79.779 billion. Combined with Q1 revenue of N67.789 billion, which was 26% above forecast, the first half of the year saw a total revenue of N147.6 billion, reflecting a 113% YoY growth and achieving 80% of 2023’s full-year revenue.
However, the company missed its Q2 revenue forecast of N118.1 billion by 32.43%. The strong Q1 performance may have been driven by cyclical factors, such as high fuel demand, which did not carry over into Q2.
This suggests potential volatility in the company’s revenue, given that fuel accounts for over 80% of total revenue. While the YoY growth demonstrates Eterna Oil’s ability to capitalize on market opportunities, the Q2 miss indicates possible operational inefficiencies or challenges that could hinder consistent growth.
Cost of Sales: Controlled but Still High:
In Q2 2024, Eterna Oil’s cost of sales was N72.88 billion, significantly lower than the forecasted N110.62 billion. Despite controlling costs, the cost of sales still increased by 120% YoY, indicating that while the company kept expenses below expectations, its cost base remains high.
This high-cost structure is eroding profitability, as evidenced by a narrowed gross profit margin of 8.65% in Q2 2024. For the first half of the year, the gross profit margin stood at 11.83%.
To improve profitability, the company will need to manage costs more effectively. If left unchecked, this high-cost structure could continue to pressure profit margins, limiting the company’s ability to convert revenue growth into profit.
Pre-Tax Profit: Improvement but Still a Loss:
One of the most concerning metrics in Eterna Oil’s Q2 2024 performance is its pre-tax result. The company reported a pre-tax loss of N268 million, an improvement from the N6.831 billion loss in Q2 2023 and better than the N3.3 billion loss in Q1 2024 and the N7.9 billion loss for the full year of 2023. However, this still fell short of the forecasted pre-tax profit of N1.675 billion.
The ongoing losses, despite the improvement, suggest that Eterna Oil is struggling to convert its revenue growth into profitability. A significant factor in these losses has been foreign exchange challenges, with a hit of N10.7 billion in Q1, reduced to N3.8 billion in Q2, resulting in a first-half loss of N14.460 billion.
Although the narrowing of losses is encouraging, the failure to meet the pre-tax profit forecast may signal deeper operational or market challenges that need to be addressed to restore investor confidence.
Why the Bullish Sentiment?
Despite these disappointing results, Eterna Oil’s stock price continues to rise. One possible reason for this bullish sentiment could be the significant reduction in pre-tax losses in Q2 2024, which investors may interpret as a sign that the company is on the verge of recovery. Additionally, the strong top-line growth, with revenue for the first half of 2024 reaching N147.53 billion (113% higher YoY), may be boosting investor confidence in the company’s potential for profitability. Another factor could be the stock’s current valuation metrics.
Despite ongoing losses, Eterna Oil’s price-to-sales (P/S) ratio stands at 0.1, significantly below the industry average of 1.32. This low P/S ratio suggests that the stock may be undervalued, attracting value-focused investors who believe in the company’s long-term potential.
Is the Bull Run Sustainable?
Eterna Oil’s Q2 2024 performance highlights challenges in converting revenue growth into profit. However, the market’s positive reaction suggests that investors are optimistic about the company’s future.
The ongoing bullish trend in Eterna Oil’s share price could continue if the company delivers stronger results in the coming quarters and addresses its operational costs.
Investors should closely monitor the company’s progress and be prepared to adjust their positions if necessary. While there is potential for upside, significant risks remain, and further missed targets or losses could lead to a re-evaluation of the stock’s value.
