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Forte Oil QI 2017; Powering The Future?

Proshare

Monday, May 22, 2017, 3:48 PM /GTI Research

Investment Highlight
First Quarter 2017: Revenue down by 7%, Profit after Tax up by 97% Forte Oil (or the “Company” or “FO”) Plc, an indigenous downstream petroleum Company released its first quarter earnings for the period ended March 31, 2017 on the 19th of April 2017.  

The Company recorded a 7.3% drop in revenue to ₦33.00 billion ($90.42 million) from ₦35.60 billion ($97.54 million) Year on Year (YoY), cost of sales also decreased but at a faster rate than revenue by 11.68% YoY, which in turn translated to a 20.77% growth in gross profit to ₦5.80 billion ($15.90 million) from ₦4.81 billion ($13.17 million) YoY.  

Despite a decline in revenue, profit after tax increased by 97.49% to ₦1.88 billion ($5.16 million) from ₦954.24 million ($2.61 million) YoY.  

This growth was triggered by depreciation in distribution expenses (44.98%) and income tax expense (52.41%), and a 50.32% rise in finance income.  

Finance cost was up by 40.90% YoY due to payment of interest on bond issued the previous year and a 13.44% increase in interest expense on bank loans and overdraft.  

Revenue from fuels declined by 23.94% YoY, however, that from lubricants and grease, and power generation grew by 50.20% and 118.61% respectively YoY.  

The fall in revenue generated from fuel sales despite the increase in pump price of petroleum products due to the partial deregulation in May 2016 shows that the company sold less volumes in Q1 2017 compared to Q1 2016.  

A comparison of the Q1 results with the full year result showed that there has been a continuous contraction in revenue from Q3 2016 till date.  

Fuel sales reduction can be attributed to scarcity of foreign exchange for importation that was predominant in the first quarter.
 

Focus is shifting to generating more revenue from sale of lubricants and power generation. 

The Company still has a large debt profile with borrowings reducing only minimally with increasing interest expense.

Valuation Analysis
Based on our analysis, the stock is currently trading at a 124.28% discount to our fair value of N107.41 ($0.29) with a 12 month investment horizon.  

We focused on the historical financial performance of the stock and our expectation for FY 2017 to arrive at our fair value for the stock.

Our fair value for FO shares was calculated using the Dividend Discount Model (DDM) comprising our expected dividend for the Company and GTI Securities customized tweak to adjust for the risk of investing in the Nigerian oil and gas sector.  

Our Required Rate of Return (RROR) factors in a risk premium of 11.15% and the yield for the most recently issued 20-Year FGN Bond was applied as the risk free rate of return.  

Forecasts
Our FY 2017 revenue forecast for Forte Oil is N170.56 billion ($467.30mn) representing a 14.78% growth relative to FY 2016, we project a 60% growth in income from power generation and 20% growth in lubricant sales.

This was evident in the values recorded in the Q1 results and we expect this trend to continue. FO raised N9 billion from the capital market via bonds to finance its retail outlet expansion and refinance existing short term commercial bank loan obligations in November 2016.  

We forecast a reversal of reduced revenue from fuel sales, with a 10% increase in income from fuel sales due to this expansion, and stability and liquidity of foreign exchange which will make importation of petroleum products easier.  

The Company has a history of growing net income even when revenue dips. The Q1 2017 results showed that operating expenses was effectively managed which boosted bottom-line growth, we project a 254% increase in PAT to N10.23 billion ($28.37mn) in FY 2017 which produces an EPS of N7.84 and a forward P/E of 13.72X.  

With inflation figures dropping three months in a row, and stability returning to exchange rate as a result of the intervention of the CBN, we expect cost lines to decline further as the year progresses, thus a higher percent of the top-line should be translated to bottom-line.

Investment Conclusion/Outlook for Forte Oil Plc
The shares of Forte Oil Plc currently trades at a 124.28% discount to our fair value estimate of N170.41.  

The acquisition of 414MW Geregu Power Plant has started to contribute significantly to the Company’s topline. Power generation contribution to revenue increased by 118.61% YoY accounting for 19.79% of total revenue in Q1 2017 compared to 8.39% of total revenue in Q1 2016.

This trend is expected to continue with the power generation business further boosting revenue growth especially with the present drive by the government to ensure that power generation in the country increases.  

FO also has the capacity to push higher fuel and lubricants volume sales through its recent retail outlet expansion financed through its issued bonds.

Stability is also returning to the Fx market which would also improve sales.  

The Federal Government is also planning to privatize the refineries in the country and set to unveil the new investors for Turn Around Maintenance (TAM) of the refineries in September this year and with the Dangote refinery coming on board, cost of sales for the Company is set to greatly reduce and hence boost net income in future.

Related News
1.      
FO Declares N1.89 billion PAT in Q1'17 Results; Revenue Declines by 7.3%,(SP:N44.00k)
2.     
Forte Oil Plc raises N9bn 5year Fixed rate Bond
3.      Forte Oil Plc Sustains FREE-FALL Pattern as Sell-Down Persists, 64% Fall To Date
4.     
FO Declares N2.23 billion PAT in Q2 2016 Result SP N175.50k
5.    
Dr. Mrs. Grace Ekpenyong Retires As a Non-Executive Director from the Board of Forte Oil Plc
6.    Forte Oil Q1 16 - Fair value of share is N92.39 SELL   
7.    
MOMAN elects Forte Oil Plc GCEO Akin Akinfemiwa as Chairman
8.   
FO Holds 37th AGM on 22nd April 2016
9.   
FO Joins United Nations Global Compact Corporate Responsibility Initiative
10.  
Forte Oil Board approves 2015 accounts - N5.8bn PAT, N3.45k Div
11. 
Forte Oil Plc Holds Investors Conference; Strategizes on Diversification of Revenue Base

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