Does MRS Oil’s financial performance justify its share price rally?

In 2022, MRS Oil’s stock outperformed the broad market with a YtD return of 28.42%, compared to the NGX All-Share Index (NGXASI) return of 19.98%.

The stock began the year at N10.98 per share and closed at N14.10 per share.

In the current year, MRS Oil has exhibited exceptional performance, with its share price surging by an impressive 680%, ranking it as the third best-performing stock on the NGX in terms of year-to-date (YtD) share price appreciation.

The key question is whether the company’s financial performance supports the ongoing share price rally.

The recently disclosed Q3 2023 results reveal significant growth in both revenue and profitability. The financial data indicates a 55.64% year-on-year growth in Q3 revenue, reaching N41.229 billion.

This took the nine-month revenue to N100.878 billion versus N69.150 billion in the same period last year.

Quarterly and nine-month operating, pre-tax, and post-tax profits have maintained a high level. Q3 post-tax profit surged by an impressive 161.32% to N1.132 billion, contributing to a substantial 338.52% year-on-year growth in nine-month post-tax profit, totalling N3.443 billion.

In fact, the nine-month results have surpassed the entire 2023 forecast across the top line, middle line, and bottom line.

According to the company’s forward-looking statement, it anticipates achieving a sales volume of 651 million liters and a profit after tax of N1.01 billion, reflecting a 164% increase over the 2022 forecast.

Furthermore, the company aims for a target revenue of N127.87 billion, with an estimated gross profit of N7.03 billion and aggregate expenditures of N6.18 billion, ultimately resulting in a profit after tax of N 1.47 billion.

The fact that MRS Oil’s performance has surpassed its own forecasts is indeed a positive sign.

When a company consistently outperforms its own expectations, it can boost investor confidence and potentially attract more interest from the market.

However, while surpassing forecasts is undoubtedly a positive indicator, the presence of low-profit margins can trigger concerns among potential investors.

In the period under review, MRS Oil recorded a limited profit margin.

This can be primarily attributed to a significant increase in the cost of sales and overall expenses.

For instance, the substantial growth in the cost of sales, particularly during Q3, which led to a decrease in the gross margin to 4.9%, had a dampening impact on the nine-month gross profit margin, reducing it to 10.84%.

In Q3, the cost of sales experienced a considerable year-on-year increase of 63.36%, reaching N39.208 billion, surpassing the growth rate of revenue. This implies that the company encountered escalated operational costs in Q3.

Furthermore, the nine-month aggregate expenditures also exceeded expectations, even surpassing the company’s full-year aggregate expenditures forecast of N6.18 billion

As a result, the net profit margin for the nine-month period was reported at 3.41%.

This figure signifies that MRS Oil retained approximately 3.41% of its total revenue as profit after considering all expenses, including operating costs, interest, taxes, and other deductions, over the specified period.

While the company’s performance has positive aspects, the net profit margin of 3.41% indicates limited profitability.  This margin essentially means that for every N100 of revenue generated, MRS Oil retains N3.41 as profit, which is relatively low.

This can be a concern for investors, as it suggests that a significant portion of the company’s revenue is being absorbed by expenses, potentially leaving a smaller cushion for financial stability.

While low profit margins may not be the sole determinant of a share price rally, they are a critical component of a company’s financial health. Investors may be willing to tolerate lower margins if they believe in the company’s growth potential and strategies to improve profitability.

The company’s management, operational efficiency, and ability to execute its strategies also play crucial roles in shaping investor sentiment and share price movements.

Additionally, how heavily or thinly traded a stock is can justify a share price rally.