Analysis and Findings
Performance
Ardova PLC has seen its revenue double over the past decade, showing a growth of 88%, which also translates to a cumulative annual growth rate (CAGR) of 6.5%. This confirms its management’s annual commitment to its shareholders for sustained growth, which is much higher than the economic environment, which had a CAGR of 2.3% over the same period.
A review of its industry peers, using Eterna Plc as a benchmark, shows that Ardova PLC outperformed others, including Eterna PLC, in revenue growth and CAGR. The benchmark’s revenue growth and CAGR over the same period were 19.49% and 1.5%, respectively.
Despite this growth, the profitability of the company worsened, as both gross profit and operating profit declined. It is significant to note that the declining margins were aggravated by the harsh economic conditions caused by the outbreak of the COVID-19 pandemic, which crashed crude prices, causing global oil inventory levels to drop to almost zero, and the slow recovery of world economies.
Our review further shows that the global turmoil caused a huge setback for the company’s operating environment, following the non-availability of forex (FX) and the rising inflation. This led to an increased cost of sales, with little possibility of passing on these costs to products like PMS, one of its main products, whose price is regulated by the federal government. The other products are deregulated but have a very elastic and competitive market, which also makes passing costs to consumers very difficult.
Results from the benchmark, however, revealed a different outcome regarding its profits, viz., its slower revenue growth. The gross profit margin increased from 2.9% to 7.8% over a decade, while the operating profit margin increased from 1.8% to 2.61%. This shows that the benchmark was able to manage external shocks better.
A review of the company’s efficiency on capital (interest-bearing debt and equity) utilization shows that its return on capital employed (ROCE) was negative. It grew from 2.8% in 2013 to an all-time high of 22.5% in 2019, the year before the global pandemic set in, but fell to -3.87% in 2022. This is way beyond its weighted average cost of borrowing of 14% in 2022.
The ROCE of the benchmark also fell from 17.5% to -9% in 2021 but made a remarkable recovery in 2022 of 22.08%, which was much higher than its weighted average cost of borrowing, which was about 15%, further buttressing the fact that it managed its external shock efficiently and also utilised the capital available fruitfully, albeit stumbling during some periods under review.
A review of the components of the ROCE showed that the company had better utilisation of its assets in earning revenue. This was shown in its total asset turnover, which increased from 1.9 times in 2013 to 3.7 times in 2022. It, however, faltered in keeping its costs in check, which drove its operating margins to a negative. The negative margins were the major reason for the poor ROCE and performance during the period under review.
Furthermore, it is worth noting that the decline in profitability witnessed by the company post-2019 could be attributed to the following:
- The acquisition of eight new company-owned , dealer-owned, and dealer-operated stations in 2019, which caused a drag amplified by the pandemic
- The low returns from its renewable solar energy investments
- A reduced focus on the strategic retail network expansion and growth of their commercial customer base. This commenced in 2013 and increased its revenue by 33%, which was five times more than the CAGR of 6% over the ten-year period under review.
…to be continued..
Understanding Probability Distributions