Japaul Oil: The Diamond in the Rough

Japaul Oil and Maritime Services Plc is the only listed company in the sector. It is into marine construction/operations, dredging services, upstream oil and gas operations, offshore vessel chartering and road transport and logistics. The company released its third quarter results recently on the floor of the Nigeria Stock Exchange.

Japaul Oil was able to grow its revenue by 45.4% year on year and 53.2% quarter on quarter while the profit after tax grew by 75.6% year on year and 38.2% quarter on quarter. There was a reduction in the net profit growth from the second quarter to the third quarter of 2010; the profit before tax which grew by exactly the same rate as the net profits mean that there was some kind of rise in costs in the third quarter of the year. The net profit margin has been on a downward trend right from the first quarter; it was 26.4% in the first quarter, 26.0% in the second quarter and 23.4% in the third quarter. This may not be a major source of concern as the 2009 full year net profit margin was only 15.7%. It is noteworthy that the company surpassed the net profits that was made at full year 2009 at the end of the second quarter of 2010.



With an asset turnover of 22.9% and leverage ratio of 1.10x equating to a debt to equity ratio of 0.10x, the return on equity stands at 5.9%. This is quite small based on the average return on equity in the Nigerian market but the uniqueness of Japaul's services which is capital intensive makes it comparable with that of petroleum marketers listed on the exchange.

The company has an estimated earnings per share of N0.22 and with a historical dividend pay out ratio of 80%, the company is likely to pay out about N0.18 per share. At the current price of N1.40, the company is selling at a forward PE of 6.4x, which far below the current market weighted PE of 12x. It is also selling at an estimated dividend yield of 12.9%, which also far above that of the weighted market average of 4.2%.

With a CAPM determined cost of equity of 13.2% and a sustainable growth rate of 1.35%, the stock should sell at a justified PE of 9.4x which is equivalent to a fair price of about N2.10. At the current price, the stock has an upside potential of about 50%, which is expected to be reached in the next two months.