Forte Oil: Can Weak Earnings Power Support Rebounding Price?

This analysis by Ambrose Omordion was first published on Monday, October 17, 2016, days after the company presented its Q3 result to the Nigerian Stock Exchange. It is reproduced in view of its price movement in 2016, especially after its third quarter score-card was presented.

The latest nine months financials of Forte Oil for the period ended September, 2016 was made available to the investing community earlier than the released date of 2015 in compliance with its post-listing requirement, making it one of the early filers on the exchange.
The numbers posted revealed mixed performance as the company’s top line pointed up while profitability level was on the decline, a deviation from its consolidated numbers since 2012 and from its peers in the downstream petroleum marketing industry, despite its integrated power and energy solution added business. The profit ratios for the period was below market expectation compared to other players.
Revenue for the 2016 third quarter rose above that of the corresponding period of 2015 by 32% to N121.08 billion from N91.62 billion. Its profit after tax was down by 34.57% from N4.28 billion in 2015 to N2.80 billion, following which Earnings Per Share for the period likewise dropped from N3.92 to N2.13 to reflect the management’s failure to grow earnings in the proportion of it additional shares that arose from a bonus issue.
The Return on Equity (ROE) stood at 6.47% from 9.32% recorded in the 2015 Q3. Also, Profit Margin at 2.31% , compared to 4.68% in 2015 is poor, which is way below standard, regardless of the high cost intensity of its business.
It is important to note that investment waiting period has dropped to 24.94x from 27.26x due to the decline in its price, while Book Value for the period was down to N32.96 from N35.30 in the same period a year ago.
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SOURCES: COMPANY DATA & INVESTDATA RESEARCH
Valuation /Recommendations
Investors should understand that this company is evolving and trying to stabilize despite the recent mixed performance. It has demonstrated strength while recovery continued and dividend payment to shareholders continue, despite dividend cut as expected in 2017. But on the strength of continued investment efforts to make it Nigeria’s premier integrated energy solution provider and in line with the aggressive drive to compete in upstream sector and power business. We have made a two-year forecast which reflects significant growth in 2017.
We expect the recent bond issuance to be successful and help boost the company’s investment to drive profit. Judging by its Price Earnings Ratio of 24.94x for the 2016 third quarter and the recent bearish mood in the market, investors should look the way of this stock when it drop below N70 per share, considering the nature of it business and ongoing expansion.
History
Forte Oil PLC is a public liability company listed on the Nigerian Stock Exchange and a foremost indigenous major marketer of refined petroleum products, with a strong presence in Nigeria’s 36 states and the Federal Capital Territory (FCT), Abuja. It is head quartered in Lagos, Nigeria’s economic nerve centre.
The Company operates a network of 500 outlets spread across the Country with major fuel storage installations at both Apapa (Lagos State) and Onne Rivers State). Its Aviation Joint User’s hydrants in Ikeja and Joint Aviation depots in Abuja, Port Harcourt and Kano makes it one of Nigeria’s leading providers of aviation fuel for local and international airlines. In addition to these strategic retail and commercial network in Nigeria, Forte Oil PLC is also well established in Ghana under the trade name – AP Oil and Gas Limited (APOG), with a network of retail outlets, liquefied petroleum gas plants and a lubricant blending arrangement with Tema Oil blending plant.
Forte Oil is currently using its presence in Ghana to leverage its expansion into other West African countries as it seeks to dominate the African Energy market.
The company also has a footprint in the upstream oil services sub-sector, where it has established a reputation of efficiency; servicing the upstream sector under trade name – Forte Upstream Services Limited (FUS). It also engages opportunities in the upstream sector to fulfill its aspirations of being present at every point of the energy value chain. Its acquisition of the 414 megawatt-Geregu Power Plant is a demonstration of the company’s strategy to deliver long term returns for its shareholders.
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Management
To diversify it driving management team, new directors are being admitted into the board of the company to strengthen its manpower with seasoned and experienced international petroleum products trader, with focus on oil, oil products, futures swaps and derivative trading with Mr Akin Akinfemiwa as managing director today. He joined the board in December 28, 2011. Supporting him to deliver value are more eight directors and management team of vibrant individuals with enviable track records, necessary to move the company to a higher level in its industry.
Four-Year Financial Performance
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Performance Analysis
Forte oil may be seen as an unstable company in terms of growth, but the price has rallied before now due to the company’s shareholding structure as the little float and a major holder continues to increase his stake. The improving performance at the early stage of its transformation from a negative position to positive as shown by the numbers posted within that period reflected on its price action. The company’s diversification has already started yielding result with the positive strong results emanating therefrom. Financial performance indicator for 2013 was up compared to that of 2012, but was unstable in 2014 and 2015 were it posted mixed numbers to reflect its investment in capacity building. The company’s profit after tax and revenue for the past four years had a mixed performance as shown in the table above. The shareholders’ fund for the period was consistently up. The recent share price rally was supported by low price attraction and industry influence.
Profitability for the period grew by over 475% from N1.01 billion in 2012 to N5.79 billion. Also, in the same vein net assets was up significantly by over 510% to N46.28 billion from N7.58 billion. The earnings per share moved from 93 kobo in 2012 to N4.11 for this period, translating to a total dividend of N9.95 paid to its shareholders with bonus shares.
Technical View
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Price action reveals that this equity had rallied from N7.80 in December 2012 to peak at N342 in April 2016, after which it dropped freely to a low of N51.16 before adjusting up to close at N106.23 last week. The profit taking is underway at N120 resistance level.
Estimated Ratios
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