Friday, December 28 2018 12:55 PM 02:05AM
/ By Meristem Securities Limited
Forte Oil Plc, a major downstream oil and gas player has taken major decisions in 2018 that will change the structure, operations and management of the company in 2019.
In May 2018, the company announced plans to divest from its power generating (Amperion Power Distribution Company), upstream servicing (Forte Upstream Services Limited, FUS) businesses, along with its downstream operations in Ghana (AP Oil & Gas Ghana), to focus its core operations around the marketing and distribution of petroleum products and lubricants. This was approved by shareholders at the Annual General Meeting held during the year.
On the 24th of December 2018, the management also notified the public of the decision by the majority shareholder, Mr Femi Otedola, to divest his entire holdings, of 75%, in order to focus on opportunities in refinery and petrochemicals. This includes his 186.26mn units of direct shares and 838.47mn shares in indirect holdings. The holdings are to be sold to the Prudent Energy Team, through Ignite Investments and Commodities Limited.
Due to the liquidity issues in the power sector, the company’s decision to focus on the downstream segment can be a good strategy to fully harness the opportunities within the downstream value chain.
The company’s effort in expanding its retail footprint alongside the introduction of new higher margin products, like Havoline and Solar, should support the company’s bottom-line going forward. Asides the positive long term performance of the company, the corporate governance of FO might also be strengthened further given the institutional ownership of majority of the shares, in the aftermath of the divestment.
However, the major downside is the sentiment surrounding the proposed exit of the majority shareholder, as this decision raises varying questions as to the long term outlook of the company.
We believe the company could have expanded its portfolio by raising capital to go into refining and petroleum chemicals, hence, the question therefore remains why this option was not explored.
Also, the dearth of information on the Prudent Energy Team and Ignite Investments and Commodities Limited raises concern over the proposed transaction, as we are not able to further access the strength of the stated firms.
On the back of this, we advise a SELL for investors with short-term investment horizon as the current rally on the stock is temporary because it is neither supported by the current state of operations of the company nor the outlook based on the recently announced 75% divestment.
For investors seeking long term value, we do not foresee the price staying above NGN40.00, hence, we also advise a SELL for investors that currently have the stock.
A re-entry at a lower price, possibly between NGN21.00 - NGN25.00, with an exit range between NGN35.00 – NGN41.00 should however yield more benefit over the long-term.
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