Ardova Jumps 38%, Share Price Eclipses Offer to Buy Minority Interest

Ardova Plc’s market valuation jerked up significantly, rising by about 38% in seven days following a report that its major shareholder has completed the final payment for asset transferred.

Traded at N26.4/ share at the close of the trading session on Frida, Ardova Plc’s market value inched up 38% to N34.385 billion with 1.302 billion shares outstanding. The company’s stock which opened at N19.2 ended the week at N26.4 as demand spiked on news that its major shareholders will finalise the acquisition deal. The final payment will speed up its parent plan to delist the company from the Nigerian Exchange.

Ardova Plc recently notified Nigerian Exchange Limited that Ignite Investments & Commodities Limited has approached its Board of Directors with the intention to acquire the shares held by other shareholders of the Company at an offer price of ₦17.38 per share.

Last week, a majority shareholder of Ardova Plc completed the company’s acquisition with the settlement of the final amount of $19 million. Chairman of Ardova Plc, Mr. Wasiu Sowami had through a Special Purpose Vehicle (SPV) -Ignite Investment and Commercial Limited (IICL) in 2020, acquired the company.

There has been disagreement in the deal as regards payment.  According to a report Sowami instituted arbitration proceedings seeking to avoid the payment of the balance of $20 million due to original owner, Mr Femi Otedola.

However, the arbitration ruled in favour of Otedola with the award of $19 million against Sowami. Ignite Investments and Commercial Limited in the 2021 financial year of Ardova had 970,666,694 shares with 74.06 percent holding.

The company’s loss widened to N7.61 billion from N3.85 billion reported in 2021 Ardova, formerly Forte Plc, is a company Otedola successfully turned around.

In April, GCR Downgrades Ardova Plc Ratings with Negative Outlook. The downgrade came following its decision to finance the acquisition with borrowings. Over the next 24 months, GCR Ratings indicated an expectation that the integrated energy company will record net losses.

It said Ardova’s earnings has deteriorated in the last 18 months.  Despite an increase in revenue, its profitability has been under pressure after large borrowings to finance the acquisition of Enyo Limited.

To strengthen its position, the management has hinted at a plan to inject equity capital in 2023. This becomes necessary as the company has low cash holdings. The rating agency also downgraded the long-term Issue rating of the company’s N25.3 billion Series 1 Senior Unsecured Bonds to B-(NG), from A-(NG) previously with the outlook revised to negative.

According to GCR, the multi-notch rating downgrade of Ardova Plc reflects the sharp and unexpected increase in debt level over the last 18 months to finance its various expansion projects. This has also been compounded by much weaker earnings and liquidity, all of which have severely impacted its financial profile, the rating note stated.

In coming to its conclusion, GCR said it has factored shareholder support from Ardova’s parent, Prudent Energy and Services Limited into the ratings, reflecting its operational integration within the wider group.

“GCR has negatively adjusted the risk score of Ardova’s leverage and capital structure to reflect sharp deterioration in leverage metrics arising from increased debt level amid weak earnings”.

The company’s debt jumped over six times to N58.6 billion in the financial year 2021 -against an expectation of around N30 billion – and remained high at N55.1 billion in financial 2022.

Whilst analysts had factored in the N25.3 billion in bonds that were issued in 2022, the additional N26 billion in bank debt pushed gross debt well above expectation, according to the rating note. The rating firm said the increased debt was utilised to finance the acquisition of Enyo Retail and Supply Limited and to fund other expansion projects within its newly established subsidiaries.

“While these projects are capital-intensive which benefits are expected to accrue over the medium term, earnings were adversely impacted during the intervening period”. Consequently, net debt-to-earnings before interest tax depreciation and amortization (EBITDA) rose sharply to 26.3x in financial 2021 and was negative at financial 2022 versus 1.1x in 2020.

The company’s operating cash flow coverage of gross debt registered at 14% in 2022 on the back of strong working capital release due to improved creditor terms. GCR said this is expected to unwind quickly as inventories are sold and suppliers are settled, reflecting high cash flow volatility.

Interest cover on the other hand is expected to remain within historical weak bounds of 0.5x to 1.0x on the back of poor earnings, according to the rating note. Given the current economic environment, GCR said it expects the debt position to remain high over the medium term, with weak leverage metrics, thus significantly constraining the ratings.

“Management has hinted at a possible equity injection in two of the new subsidiaries of Ardova before the end of financial 2023 which may support an improvement in capital structure. However, such support will need to be substantial to reduce gearing risks”, GCR stated.

Concurrent with the rise in debt, Ardova’s earnings have deteriorated over the last 18 months with a negative EBITDA of N0.5 billion after declining to N1.5 billion in financial 2021 versus N5.2 billion in 2020) notwithstanding an increase in revenue over the period.

Thus, the company’s EBITDA margin fell to 0.7% and negative 0.2% in 2021 and 2022 respectively, from 2.9% in the financial year 2020.

Analysts attribute this to rising inflation, volatility in product supply, and government interferences on product pricing as the bulk of sales (over 70%) is derived from the regulated and low-margin product, petrol.

“This remains a key risk to Ardova’s earnings until product prices are fully deregulated.”

While GCR expects revenues to grow by 12% to 14% over the near term largely driven by higher volumes, especially from lubes and LPG, analysts stated that the EBITDA margin is projected to remain low between 1% and 1.5% over the medium term.

The rating note said this expectation due to inflationary pressures and sustained pricing rigidity, thus, project a further net loss over the next 24 months.

“The company’s liquidity profile is pressured by weak projected cash flows and low cash holdings, which are not sufficient to meet the short-term debt of N9.1bn in financial 2023 and an estimated N10bn in financial 2024 respectively”.

However, it said a portion of inventories has been factored into the calculation, as it comprises primarily fast-selling petrol, which raises our liquidity ratio to around 1x over the next 12 to 18 months.

The rating firm agreed the company has access to a wide pool of financiers with whom it has maintained a good relationship over the years, but the increased likelihood of default on short-term obligations is negatively viewed.

The accorded ratings are supported by Ardova’s relatively good competitive position within the Nigerian oil and gas downstream sector, and the strong support from its parent company, PESL.

The parental support reflects Ardova’s importance within the wider group, given the high-level strategic and operational integration into Prudent Energy & Services Limited.

Nevertheless, management and governance assessment continue to be constrained by the weaker corporate governance at the Group level. The negative outlook reflects GCR’s concerns that the company’s high debt level is unsustainable, given the expected weak earnings over the near term.

Ahead of planned shares mop up by Ignite Investments & Commodities Limited, Afrinvest, an investment firm has advised investors to be neutral in trading Ardova Plc shares.

The company with 1.302 billion outstanding shares has about 332 million available to be mopped up via the Nigerian stock market, subject to regulatory approvals.