Aradel Holdings Plc, formerly Niger Delta Exploration & Production Company (NDEP), has undergone a remarkable transformation, evolving from a dominant OTC player to a key contender on the Nigerian Exchange (NGX).
Starting at N350 per share on the NASD OTC platform in 2013, the company achieved 2,719% growth and a 35.47% compound annual growth rate (CAGR) over 11 years. Its stock peaked at N9,867.38 in 2024 before a re-denomination, which reduced the share price to N469.95.
The company debuted on the NGX on October 14, 2024, at N702.69 per share, bringing its market capitalization to N3.05 trillion. The stock initially surged but fell by 33.83% YtD closing at N465 as of December 10, 2024.
In the first nine months of 2024, Aradel reported a 477% year-on-year growth in earnings per share to N25.45, leading to the payment of an interim dividend of N8 per share.
Given its strong financial performance, including the dividend payment, coupled with post-listing share price volatility, the decision to buy, hold, or sell ARADEL requires further analysis to gain deeper insights.
Revenue performance:
Aradel’s revenue trajectory has been impressive. From N39.05 billion in 2018, the company saw a significant increase, reaching N221.14 billion in 2023, and a compound annual growth rate (CAGR) of 41.45%.
In 2024, revenue growth continued with a 207% YoY surge, reaching N377.6 billion by the end of the third quarter. This figure surpassed the 2023 full-year revenue by 70%.
- The main drivers of this strong performance include higher global crude oil prices, which averaged USD82.49 per barrel, and significant gains in production across key areas.
- For example, crude oil output increased by 146.82% YoY to 9,737 bblpd, while gas output grew by 48.6% and refined product volumes rose by 74.62%.
Providing further insights, Aradel’s CEO, Adegbite Falade, remarked:
“Our performance in the first nine months of 2024 builds on the strong operational and financial improvements achieved in 2023. Increased production, diversification of revenue streams, and the acquisition of the Olo and Olo West Marginal Fields have positioned us for sustained growth and efficiency
Despite the impressive top-line growth, Aradel’s cost of sales has been rising at a faster pace than revenue, with a significant increase in 2023 and 2024.
- In 2023, costs surged by 207.56% to N73.21 billion, which continued in 2024 surging by 211% to N166.8 billion.
- Aradel’s rising costs suggest potential risks to its profitability and long-term sustainability.
- Addressing these cost increases will be crucial to avoid the financial pitfalls associated with margin erosion and cash flow challenges.
Profitability and margins vs. assets utilization:
Aradel has demonstrated consistent growth in profitability. In 2023, its profit before tax surged by 237%, reaching N112.164 billion, compared to N33.26 billion in 2022.
The momentum continued into 2024, with Aradel achieving remarkable results in the first nine months. Pre-tax profits surged by 412% YoY reaching N191.457 billion, surpassing the entire 2023 PBT by 71%.
This impressive performance highlights the company’s ability to sustain and even accelerate its financial growth, reflected in healthy profitability metrics: a gross profit margin of 56%, EBITDA margin of 63%, operating profit margin of 45%, pre-tax profit margin of 51%, and post-tax profit margin of 29%. These figures highlight robust cost management and operational efficiency.
However, in terms of asset utilization, the company demonstrates limited efficiency, reflected in its asset turnover ratio of 0.22x. This indicates that for every naira invested in assets, the company generates only 22 kobo in revenue.
This low asset turnover has weighed on return on equity (ROE), which stands at 8.16%, despite the strong net profit margin.
While profitability remains solid, improving asset utilization could significantly enhance shareholder returns. By optimizing the effectiveness with which assets generate revenue, Aradel can leverage its existing resources more efficiently.
For example, if Aradel were to improve its asset turnover ratio to 0.5x or higher, it would generate substantially more revenue per unit of asset invested, directly boosting profitability and increasing ROE. This improvement could positively affect investor sentiment.
In addition, Aradel’s low leverage, demonstrated by its debt-to-equity ratio of 5.76% and equity multiples of 1.29x, provides room for increased borrowing, which could further enhance returns if deployed effectively.
Introducing modest leverage, given the comfortable interest coverage ratio of 14.65x, would boost ROE. The company could take on additional debt without concerns about covering interest payments, further amplifying returns through operational growth.
That said, Aradel Holdings has strong operating cash flows, which is good. Operating cash flow grew by 130.5% YoY to N228.887 billion as of the first nine months of 2024. Consequently, net cash flows from operating activities also saw a sharp increase of 128.6%, rising to N213.449 billion.
Overall, Aradel’s strong financial performance has contributed to a “buy” rating on its stock.
- In November 2024, ARM analysts forecasted significant growth potential for ARADEL with a target price of N637.39, representing a 19.4% upside from its closing price of N533.80 on November 14, 2024. This positive outlook is supported by Aradel’s strong fundamentals, including its robust oil and gas reserves and expansion prospects.
- Furthermore, analysts at Arthur Steven Asset Management, using a Discounted Cash Flow (DCF)-based valuation, estimated a target price of N1,258.77 per share, suggesting substantial potential for capital appreciation. This DCF valuation reflects the company’s unique position in both upstream and downstream operations and its strong growth trajectory.
Despite the analysts’ bullish outlook, with target prices suggesting substantial upside, the stock’s performance has not yet reflected this optimism.
ARADEL is currently trading at N465, which is significantly lower than the target price forecasts. This indicates that despite analysts’ optimism about the company’s growth potential, the market has not yet fully priced in these prospects.
The current market price may present a buying opportunity for investors who believe in the company’s long-term growth trajectory and are willing to overlook short-term volatility.
Overall, while concerns over asset utilization and margin sustainability exist, the company’s strong financial position, low leverage, and significant room for operational improvements suggest a positive long-term outlook.
Investors may consider buying or holding ARADEL due to its strong growth prospects and dividend payment potential.
Aradel’s retained earnings are strong, reinforcing its capacity to continue supporting dividend payouts and fund future expansion.