ECONOMIC FACTORS WEIGH IN ON REVENUE
The Company financial statements for the first quarter 2015 showed a 4.94% decline in revenue to N33.06 billion from N34.78 billion in the corresponding period of 2014. The decline in revenue for the quarter is attributable to a 9.07% decline in revenue from its fuel segment to N27.7 billion in Q1 2015 from N30.5 billion in Q1 2014. Cost of sales also declined by 3.79% to N29 billion in Q1 2015 from N30.15 billion in the corresponding period of 2014. The reduction in cost of sales was as a result reduced operational expenses in the power generation segment. Expectedly, due to the reduction in revenue in the period under review, gross profit declined by a significant 12.45% to N4.05 billion in Q1 2015 from N4.63 billion in Q1 2014. In addition, gross profit margin also declined to 12.26% from 13.31% in the corresponding period of 2014.
DROP IN OPERATING PROFIT DESPITE SIGNIFICANT GROWTH IN OTHER INCOME
The company was able to grow its other income massively by 96.67% to N566m in March 2015 from N287m in March 2014. On the other hand, distribution expenses declined by 6.06% to N693.4m in March 2015 from N738m in the corresponding period of 2014. Administrative expenses followed suit with a near flat 0.15% decline to N2.425 billion from N 2.428 billion over the period. Despite the significant growth in other income and the slower decline in both distribution and administrative expenses, operating profit for March 2015 declined by 14.27% to N1.5 billion from N1.75 billion in the corresponding period of 2014.
DWINDLING NET INCOME ON THE BACK OF INCREASED FINANCE COST
For the first quarter of 2015, the company’s net finance cost increased by 37.01% to N658m in March 2015 from N480m in the corresponding period of 2014. This is as a result of the significant increase in finance cost compared to finance income. Finance cost increased by 20.06% to N952m in Q1 2015 from N793m in Q1 2014 while finance income declined by 5.95% to N294m in Q1 2015 from N313m in the corresponding period of 2014. Therefore, the company declared a profit after tax of N783m showing a significant decline of 28.98% in March 2015 from N1.1 billion in the corresponding period of 2014. The decline in net income for the period is attributable to the fall in operating profit and increased net finance cost for the
WEAK BALANCE SHEET PERFORMANCE
The company’s total assets declined by 12.57% to N121.74 billion in March 2015 from N139.24 billion in December 2014 due to significant decline in cash and cash equivalents by 53.09% to N7.8 billion from N16.6 billion in December 2014. Inventories also declined by 30.86% to N8.4 billion in March 2015 from N12.2 billion in December 2014. The company’s total liabilities declined by 19.26% to N76.6 billion in March 2015 from N94.9 billion in December 2014. The decline in total liabilities is attributable to a 96.99% drop in short term loans and borrowing of the company to N369m in March 2015 from N12.3 billion in December 2014. However, bank overdraft increased significantly by 57.65% to N26 billion in March 2015 from N16.4 billion in December 2014. This arguably accounted for the significant increase in interest income as highlighted earlier as long term borrowing remained largely unchanged at N12.081 billion- a -1.3% decline from prior year. Trade and other payables also declined by 30% to N36.761 billion from the corresponding quarter in the prior year. This highlights the significant contraction in core businesses of the Company in the first quarter of the year, but also an improvement in assets quality. However, its net assets increased marginally by 1.76% to N45.11 billion in March 2015 from N44.33 billion in December 2014 representing the increase in retained earnings.
HOLD RECOMMENDATION MAINTAINED
In the near term, we do not expect any major shock in the industry that will negatively affect the operations of key players. The myriad of developments that are expected to change the shape of certain industry norms are expected effects over the medium term. The passage of the Petroleum Industry Bill (PIB) has been stalled at the National Assembly and therefore we do not expect any major shift to power supply with likely implications for a decline in fuel consumption. Possible reorganisation of the subsidy regime, however, appears to be in the offing with the change in administration and unending fuel scarcity in the country. In this regard, we are of the opinion that Forte oil is appropriately position to benefit from such reorganisation. However, we are cautious in valuing Forte Oil Plc’s shares, given that the key price multiples - price to earnings, price to book, and price to sales are significantly above those of its peers in the industry. Based on the company’s current performance, we maintain our earlier gross revenue and net income projection of N181.03 billion and N4.40 billion respectively for full year 2015; leading to a forward EPS of N4.63. Using multiples valuation method, we arrive at a target price of N130.36 over the next 3 months. Since this represents a downside potential of 14% on the current price, we recommend a HOLD on the shares of Forte Oil Plc.