Stocks To Avoid: Oando PLC

First, it's just a mere coincidence that Oando is the first in my series on stocks to avoid. I have nothing personal against Oando nor the company managers. All my points are strictly from an objective and investment perspective. And as no one knows the future, you shouldn't take my word like it's God's.

Meet Oando

What better way to introduce Oando than using their own very words from their 2016 annual report on their principal activity.

The principal activity of Oando Plc. ("the Company") locally and internationally is to have strategic investments in energy companies. 

The Company was involved in the following business activities via its subsidiary companies during the year reviewed:
a) Exploration and production (E & P) - Oando Energy Resources Inc., Canada, engaged in production operations and other E & P companies operating within the Gulf of Guinea.
b) Supply and distribution of petroleum products - Oando Trading Dubai and Oando Trading Bermuda.
c) Pipeline construction and distribution of natural gas to industrial customers - Alausa Power Limited.

During the year, the company divested the following business activities conducted via its subsidiaries:
a) Marketing of petroleum products, manufacturing and blending of lubricants - Oando Marketing Ltd (formerly Oando Marketing Plc) and other petroleum products marketing companies.
b) Pipeline construction and distribution of natural gas to industrial customers - Gaslink Nigeria Limited, Oando Gas and Power Limited, Akute Power Limited and other gas and power
companies.
c) Supply and distribution of petroleum products - Oando Supply and Trading Limited and Ebony Oil & Gas.
d) Energy services to upstream companies - Oando Energy Services, and other service companies.

The Company’s registered address is 2 Ajose Adeogun Street, Victoria Island, Lagos, Nigeria.

Revenue, Net Income and Debt

Just so you wouldn't think I am cooking up the figures, below are the snapshots of Oando's revenue and net income for the last four years.

So now you should trust my chart below of the Revenue, Net Income and Total Liabilities of Oando for the last 12 years. Net Income is the green line, Revenue is the blue line and Total Liabilities is the red line.

Don't think that the green line is on zero. Oando obviously operates a very low margin business but one also of very high revenue. So those net income figures you are looking at are all in billion naira.

The Red Flags

The number one red flag for me is that Oando is in a very margin sensitive section of the industry. It spent 93% of its revenue on COGS (Cost of Goods Sold) in 2016 and 77% of revenue on COGS in 2015. Somehow, it is having a very tough time passing any increase in its production costs to its customers, and that is a big red flag in my investment analysis.

Number two red flag is that its debt is worryingly high. Too high for me to sleep easy putting my money in the company's shares. Just take a look at its Total Liabilities, see how it's gone way high above its revenue. That breaks a lot of gearing ratio signals. 

Number three red flag is that the industry is a very troubled one. Until I see a clear improvement signal in that industry, I would rather put my money to work in another industry company's shares. And what makes things worse for Nigerian upstream companies is that they are not innovators. They import almost everything -- even to manpower. The US shale companies at least are innovating and bringing down their cost of production; the big IOCs are technology leaders. Our dear indigenous oil producing companies have no innovative edge that helps them better face the troubles in that industry.

Finally, all the audited RO's are low. Return on Equity is at 3.93, Return on Assets is at a very poor 0.32, Return on Capital, despite the heavy leverage, is at 10.51 and Return on Invested Capital is at 5.03. And it's same for all the margins: 6.32% for Gross Margin, 5.94% for EBITDA margin and 1.84 for Operating Margin.

My Verdict

If you are not a speculator, trying to make a quick bucks of market volatility, then I'll say you should stay clear of Oando shares for now.