FORTE OIL PLC: Increased operational efficiency begets rise in profitability

Forte Oil Plc increased operational efficiency leads to remarkable rise in profitability despite notable decline in its top line earnings. The 2015 result is comforting and promising at a period when companies in the oil and gas industry across the globe are recording substantial decline in top-line and profitability due to crude oil trading at its lowest price in about 10 years. Forte Oil Plc (Forte Oil), a downstream oil marketing company has been in existence for over 50 decades during which it has undergone several restructuring arrangements. It started operations originally as British Petroleum (BP) before changing to African Petroleum (AP). In 2007, Zenon Petroleum acquired 28.7% stake in the company through shares divestments by the Nigerian National Petroleum Corporation (NNPC). This was followed by a restructuring exercise that led to the adoption of the brand name “Forte Oil Plc” in December 2010. Forte Oil is a strong downstream petroleum company with about 500 retail outlets located across the thirty-six (36) states of the country. This has increasingly helped to enhance the company’s visibility and sales strength.

REVENUE IN REVENUE DRIVEN BY FUEL CONSUMPTION

For the first quarter period ended March 2017, Forte Oil showed decline 7.30% in revenue to N33.00 billion from N35.60 billion recorded in the corresponding period of 2016 resulting from decreased fuel sales by the company due to reduced purchasing power of consumers in the country. Cost of sales also followed suit with a decrease of 11.68% to N27.20 billion in March 2017 from N30.80 billion in March 2016. The decrease in cost of sales was as a result reduced operational expenses to meet consumer demand in the fuel segment.

INCREASED IN PROFITABILITY DRIVEN BY OPERATING INCOME

Gross profit for the first quarter ended 31st March, 2017 rose significantly by 20.77% to N5.80 billion from N4.81 billion in March 2016. Due to the increase in gross profit, gross profit margin rose to 17.58% in 2017 from 13.50% in the corresponding period of 2016. The Company’s performance aside revenue was notable as its operating profit grew by 48.29% to N3.63 billion in March 2017 from N2.45 billion in March 2016. This is driven by a significant decline in distribution expenses of 44.98% to N502m in March 2017 from N912m recorded in the corresponding period of 2016. On the other hand, administrative expenses grew by 4.65% to N2.32 billion from N2.22 billion over the same period while other income declined by 16.05% to N648m in March 2017 from N772m from March 2016. Hence as at the end of March 2017, operating profit margin rose slightly to 10.99% from 6.87% during the period under review. MASSIVE GROWTH IN PROFITABILITY ENHANCED BY DECLINE IN TAXATION For the first quarter ended March 2017, Forte Oil’s net cost of finance increased massively by 37.81% to N1.58 billion from N1.14 billion over the corresponding period of 2016. Thus, profit before tax grew to N2.05 billion showing a remarkable increase of 57.49% in March 2017 from N1.30 billion recorded in the year 2016. Forte Oil’s net income for the period ended, March 31st 2017 grew significantly to N1.88 billion from N954m over the period of 2016, representing a change of 97.49%. Qualitative increase in asset quality Total assets grew moderately by 1.97% to N143.53 billion in March 2016 from N140.76 billion in December 2016 as the Company trade receivables grew by 7.10%. The Company’s total liabilities rose by 1.20% to N98.59 billion in March 2017 from N97.42 billion in December 2016. The rise in total liabilities can be attributed to increase in trades and other payables as well as bank overdraft. Furthermore, net assets rose by 3.70% to N44.94 billion from N43.33 billion over the period. In addition, return on Asset (ROA) grew remarkably to 1.31% from 0.68%. Also, Return on Equity (ROE) also rose to 4.19% from 2.20%.

BUY RECOMMENDATION

Myriad of developments that are expected to change the shape of this industry norms over the medium term have evolved as expected, which make prices of petroleum products to be determined by the total cost per unit till point of sale. Continuous management of foreign exchange rate by the Central Bank of Nigeria’s control measures will lead to appropriate price mechanism in the downstream petroleum sector to cover both landing cost and freight expenses towards ending any further disruption in the sale of the products or sudden price changes. We believe Forte Oil will maintain its power generation as the country’s power generating capacity appears bleak towards positive implications for the downstream oil and gas in the short-term. However, we are of the opinion that Forte oil is appropriately positioned to benefit from current foreign exchange control plus effectiveness in

HOWEVER, WE ARE OF THE OPINION THAT FORTE OIL IS APPROPRIATELY POSITIONED TO BENEFIT FROM CURRENT FOREIGN EXCHANGE CONTROL PLUS EFFECTIVENESS IN MANAGEMENT’S STRATEGIC PLAN TO CONTROL ITS COST OF OPERATION AND ITS GROWING COST OF FINANCE

management’s strategic plan to control its cost of operation and its growing cost of finance. To this end, we are value Forte Oil Plc shares using price to earnings of 17.06. Based on Company’s current performance, we project gross revenue to N168 billion and net income projection to N3.76 billion for full year December 2017; leading to a forward EPS of N3.82. Using multiples valuation method, we arrive at a target price N65.12 over the next 6 months. Since this represents an upside potential of 30.15% on the current price, we therefore recommend a BUY on the stock of Forte Oil Plc.