Rak Unity profit drops over rising cost of sales

The first half (H1) financial statement of Rak Unity Petroleum Plc released on Monday to the Nigerian Stock Exchange (NSE) revealed that the company’s profit margins are experiencing a tight squeeze as a result of its persistently high cost of sales and dwindling revenue.

Gross profit margin for the company fell from 5 percent in first half of 2017 to just 3 percent in first half 2018.

This implies that cost to revenue ratio of the firm reached 97 percent during the first half of the year, up from 95 percent during the same period last year. This was even as the company’s revenue reduced by 8 percent as its revenue fell from N5.7 billion in H1 2017 to N5.3 billion in H1 2018. The tight squeeze on profit margins had serious repercussions on the bottom-line of the company.

The downstream petroleum company’s Profit Before Tax (PBT) and Profit After Tax (PAT) both fell by 110 percent as the company’s PBT fell from N82 million in H1 2017 to a negative return of N8 million. The PAT fell from N56 million in H1 2017 to a negative PAT of N6 million in H1 2018.

Analysis by Businessday on the profitability of the company also revealed that the company’s net margin fell from 1 percent in H1 2017 to (-0.16) percent in H1 2018. The firm’s asset turnover which tells us how well the company utilizes its asset in generating its revenue also fell from 4.3x in H1 2017 to 1.3x in H1 2018. This drop in earnings could be attributable to the current situation prevailing in that sector.

Emmanuel Afimia, CEO of Afimia Consulting  said that “the cost of sales of oil companies especially the downstream companies has always been on the high side and was one of the reason many marketers hoarded their products last year December to cause artificial scarcity and benefit from the temporary increase in the petrol price”. He also added that “the high cost of sales could be attributed to the rising high crude oil price and the cost of transportation of these products”.

Looking further, we discovered four things that accounts for the company’s revenue and Cost of sales which are; automatic gas oil (AGO), premium motor spirit (PMS), dual purpose kerosene (DPK) and lubricants (LUBES). The firm generates much more from it’s AGO operations but it also spends much more on its sales. The cost of sales to revenue for AGO increased from 92 percent in H1 2017 to 96 percent in H1 2018, and this could be said for the other components in the company.

Dolapo Ashiru also shared the same view on the persistent high cost of sales for these companies, he said that “out of all the product that these downstream companies sell when it comes to petroleum the price is fixed and the cost is far higher than the price and if not for the subsidy of the government the price of the product will be far higher than what we see now”.

“Where some of these companies actually get their money is in the sales of white product such as diesel, cooking gas which they have some level of price control. The margin is higher for these white products than the petroleum product” he cited 11 Plc as an example whose main source of revenue is its rental income.

The company’s share price has not moved from N0.40, its low of the year when it fell from 0.42 in July.

On the outlook for the company, Afimia foresees higher crude oil prices, which would translate to higher cost for the downstream sector as the United State just recently imposed a sanction on Iran which could reduce the supply of crude thus pushing up the price of oil.

He ended by saying that some of the ways in which the company and the sector in general  could be helped would be government intervention on the restoration and support of local refineries such as Dangote’s refinery and other local refineries with other incentives given to marketers of these product.