5, 2017 1:09AM/ Vetiva
We initiate coverage on Forte Oil PLC (FO) with a BUY rating and Target Price of ₦92.01. Our valuation is based on Discounted Cash Flow (DCF) modelling of FO’s forecast earnings from existing business lines. Our positive stance on FO is hinged on its growing integrated model approach to the energy business, strong footprint in the power sector, expansion plans for its flagship fuel marketing business and improving corporate governance. Our valuation presents a 91% upside to the market price of FO as at the date of this report.
Diversified Energy Portfolio
From a pure play fuel marketing business, FO has grown to an integrated energy player with footprints across several non-fuel businesses. The current diversified portfolio strategically positions the company across the energy value chain, thereby providing some level of insurance against potential shocks from the flagship fuel segment. More importantly, all the Non-fuel segments command significantly higher margins. As the market continues to await full deregulation and liberalization of the downstream petroleum sector, the integrated energy model will continue to support margins.
Improving Corporate Governance
Aside turning around from a near moribund entity in 2009 to a financially stable company today, FO has undergone vast improvement in its corporate governance structure, inciting satisfactory reviews from PricewaterhouseCoopers over the past 3 years. Reflecting the improvement, 4 out of 8 board members of FO are Independent Non-Executive Directors of high caliber. In a bid to protect their strong and widely recognized reputation in the market, we believe these directors would give no room for company actions that are not only unethical but also fall short of strongest level of corporate governance.
Robust Product Distribution Network
As a fuel Major, FO has a wide distribution network – a prerequisite to thrive in the thin margin downstream petroleum sector. Through steady expansion, FO has grown its retail outlets to 450, representing about c.19% share of outlets controlled by Majors. The company plans to raise ₦20 billion equity capital in the short term (currently on hold amidst ongoing corporate restructuring), part of which will be channeled to adding another 350 retail outlets over the next five years. Upon completion, FO could have the largest retail footprint in the country.
Reaping From High Margin Power Generation:
FO’s power investment, Geregu Power Plant (GPP), is one of the few successor GENCOs with nameplate capacity fully operational. Since completion of its overhaul in October 2016, GPP has steadily ramped up capacity and currently operates in the 80s. By FY’18 where it will have its first full year of steady operation, GPP is forecast to generate ₦17 billion in gross profit, and account for 55% of group gross profit vs 10% at acquisition (Nov 2013).
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