Eterna Oil recently released its Q2 2024 results, and the numbers appear not what investors might have hoped for.
The company missed its forecast across key performance indicators, raising concerns about its ability to meet expectations going forward.
However, in a surprising turn of events, the share price has continued its upward trajectory, with a year-to-date gain of 83.39% as of the close of trading on August 27, 2024; about 78% of the impressive 107% YtD gain recorded in 2023.
Missed Targets:
Revenue Growth with a Caveat:
Eterna Oil’s revenue for Q2 2024 grew by an impressive 109% year-on-year (YoY), reaching N79.779 billion. When combined with Q1’s revenue of N67.789 billion, which was 26% above forecast, the first half-year revenue totalled N147.6 billion; reflecting a 113% YoY growth and achieving 80% of 2023’s full-year revenue.
However, the company fell short of its Q2 forecast of N118.1 billion by 32.43%. The Q1 forecast beat could be seen as part of the cyclical nature of the business, likely driven by strong fuel demand, which boosted early-year performance.
However, the significant miss in Q2 suggests that these conditions were not sustained or that the company faced unexpected challenges later in the year.
This inconsistency highlights potential volatility in revenue, especially given that fuel contributes over 80% of total revenue. Such fluctuations could raise concerns about the company’s ability to maintain steady growth.
For Eterna Oil, the robust YoY growth demonstrates its ability to capture market opportunities, but the Q2 miss indicates possible operational inefficiencies or market challenges that need to be addressed.
For investors, the strong revenue figures could be encouraging, but the significant forecast miss adds a layer of risk, highlighting the volatility and uncertainty in the company’s revenue streams.
This mixed performance might influence investment decisions, with some investors possibly re-evaluating their confidence in the company’s ability to sustain growth.
Cost of Sales: Controlled but Still High:
- Eterna Oil’s cost of sales for Q2 2024 was N72.88 billion, notably lower than the forecasted N110.62 billion.
- Despite this apparent control over costs, the cost of sales still grew by a substantial 120% YoY. This growth indicates that while the company successfully kept its costs below expectations, the expenses associated with generating revenue remain high.
- The high-cost base is a double-edged sword. On the one hand, the company avoided the higher costs it anticipated, but on the other hand, the significant increase in costs YoY suggests that managing expenses remains a major challenge.
- This high-cost structure is eroding profitability, as evidenced by the gross profit margin narrowing to 8.65% in Q2 2024, compared to the previous year. The high-cost base also moderated the gross profit margin to 11.83% for the first half of the year.
- Managing and reducing costs more effectively will be crucial moving forward. The current cost structure, if left unaddressed, could continue to pressure profit margins and limit the company’s ability to convert strong revenue growth into actual 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 loss before tax of N268 million, a significant improvement from the N6.831 billion loss recorded 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 result still fell short of the company’s forecasted pre-tax profit of N1.675 billion.
The ongoing losses, despite the improvement, suggest that Eterna Oil is struggling to convert its impressive revenue growth into actual profitability.
A primary driver of these losses has been foreign exchange challenges, with a significant hit of N10.7 billion in Q1, though this was reduced to N3.8 billion in Q2, moderating the first-half loss to N14.460 billion.
The narrowing of losses is encouraging, but the inability to meet the pre-tax profit forecast could signal underlying operational or market challenges that need to be addressed to instil confidence in the company’s prospects.
Why the Bullish Sentiment? Despite these disappointing results, Eterna Oil’s stock price has continued to rise.
One possible reason for this bullish sentiment could be the significant reduction in pre-tax losses in Q2 2024. Investors might view the narrowing loss as a sign that the company is on the verge of turning its fortunes around.
Additionally, the strong top-line growth, with revenue for the first half of 2024 reaching N147.53 billion; 113% higher than the previous year, might be bolstering investor confidence in the company’s ability to eventually return to profitability.
Another factor that could be fueling the bullish sentiment around Eterna Oil’s stock is its current valuation metrics, which might appeal to certain investors despite the company’s lack of profitability.
Although Eterna Oil cannot be valued using the price-to-earnings (P/E) ratio due to its ongoing losses, other valuation measures suggest that the stock might be undervalued relative to its peers, potentially attracting value-focused investors.
Eterna Oil’s price-to-sales (P/S) ratio stands at 0.1, which is significantly below the industry average of 1.32. This low P/S ratio indicates that investors are paying much less for each unit of sales compared to other companies in the same industry.
Such a discrepancy can be seen as a buying opportunity, particularly if investors believe that the company will eventually turn around and convert its strong sales into profitability.
Is the Bull Run Sustainable? Eterna Oil’s missed Q2 2024 forecast highlights several challenges the company faces, particularly in converting revenue growth into profit.
- However, the market’s reaction suggests that investors are still hopeful about the company’s future. The ongoing bullish trend in Eterna Oil’s share price could be sustained if the company can deliver stronger results in the coming quarters and address 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, the risks remain significant, and any further missed targets and/or losses could lead to a re-evaluation of the stock’s value.