Stock & Analyst Updates | |
Stock & Analyst Updates | |
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Friday, May 17,
2019 / 09:03AM / CardinalStone Research
After the recent sale of the power and upstream
businesses in Nigeria as well as the downstream operation in Ghana, Forte Oil
Plc (FO) is well positioned for growth through an expansion of itsretail
footprint in the Nigerian downstream oil and gas space. In this report, we
adjust our forecasts to reflect the impact of recent asset sales and ongoing
retail expansion drive in Nigeria.
FO is aiming to expand
its retail footprint by 40.0% over a 3-year period
Revenue is likely to increase by
36.4% YoY to N183.7 billion in FY19E
Our revenue forecast is driven by anticipated volume
increases across FO’s product portfolio, aided by recent retail expansion
efforts. According to management, volume growth (Q1’19) in the PMS (+71.0%
YoY), AGO (+16.0% YoY), and lubricant (+13.0% YoY) segments was driven by the
introduction of 23 new outlets in the preceding twelve months. Thus, in spite
of the regulatory cap on PMS pricing in Nigeria and a 5.1% YoY contraction in
crude oil prices, FO was able to grow revenue from its fuels and “lubricants
& greases” segments by 54.3% YoY and 12.1% YoY to N38.4 billion and N4.2
billion respectively, in Q1’19. Overall, pass-through from the ongoing
expansion resulted in a 50.0% YoY increase in group revenue to N42.6 billion in
Q1’19. For FY’19E, we expect volumes to increase by over 25.0% across key
product segments such as PMS, AGO, and DPK. We also expect the company to grow
its lubricant volumes by 12.8% YoY in FY’19E.
FO has disposed of its upstream,
power, and Ghana assets
The decision to divest represents a significant
departure from FO’s prior plan to pursue M&A activities along the energy
value chain and acquire marginal oilfields to boost its upstream business. We
believe the verdict to sell the Nigerian power business may have been
influenced by the persistent liquidity crisis in the sector (power accounted
for c.65.2% of FO’s outstanding receivables in FY’17), while the decision to
divest from the Ghana operations likely reflected sustained weaknesses in its
operating performance. The sale of the assets led to a loss on disposal of N1.6
billion that was booked in FO’s Q1’19 income statement. Thus, our revenue
forecasts for FY’20E (and beyond) now excludes contributions from the divested
businesses. Notwithstanding, we expect FO to grow its revenue at a CAGR of
10.0% over our 5-year forecast horizon, aided by management’s ongoing
investments in retail footprint expansion in Nigeria.
Efficient handling of S&D costs
is likely to drive EBIT margin to 4.3% in FY’19E
We expect management’s improved freight cost
containment to largely support EBIT margin in FY’19E. The company is also
likely to enjoy some scale-induced cost benefits as it continues its footprint
expansion in Nigeria. In addition to this, we believe the sale of the Ghana
business, which is typically margin dilutive, is positive for group operating
performance going forward. On this wise, we now forecast FY’19E EBIT margin
2.3ppts higher YoY. We note that our EBIT margin expectation is also
significantly higher than the historical average (3.8%). Looking back, we note
that FO experienced sharp margin compression in FY’17, following a dip in
volumes across its product portfolio, occasioned by the discontinuation of
private importation of PMS. Operating margin was further driven to an
eight-year low of 2.0% by significant increases in the cost associated with
changes in inventories on higher global crude prices (+32.5 YoY) in FY’18.
Thus, aided by the low base implied by the FY’18 numbers, we now expect EBIT to
grow at a CAGR of 26.9% over our five-year forecast horizon.
Free Cash Flow to Equity (FCFE) is
likely to remain negative in FY’19E
The firm experienced lesser cash management set-back in Q1’19, reporting a 41.5% YoY decline in FCFE deficit to negative N518.3 million. The smaller FCFE deficit was driven by improvement in cash flow from operations (+49.4% YoY), with days of inventory reducing to 81 days in Q1’19 (vs. 95 days as at Q1’18). We also note the significant improvement in receivables management in Q1’19 (days of receivables: -50.7% YoY to 336 days). Going forward, we expect the company’s FCFE to strengthen to N8.8 billion in FY’19E, compared to negative N6.1 billion in FY’18, on significant cash inflow from sale of assets. Precisely, FO realized N13.0 billion from the sale of its upstream, power, and Ghana businesses that could net-off a c.N1.8 billion capex burden in FY’19E. The sale of these assets is also likely to reduce receivables burdens and provide support for operating cash flow.
On a broader note, we highlight that the working
capital risk in the downstream sector stems from a complete reliance on the
NNPC for PMS imports and allocation. This weakness is likely to limit scope for
material gains in FCFE beyond FY’19E. FO trades at a FY’19E EV/EBITDA of 6.4x
compared to 9.1x for Bloomberg peers. We have a 12-month TP of N44.54 and a BUY
recommendation on the stock.
Related News
1.
Forte
Oil Plc Notifies Of Divestment and Sales Of Its Subsidiaries
2.
Forte
Oil Plc Holds Extraordinary General Meeting On February 7th, 2019
3.
Forte
Oil Denies Involvement With Skye Bank Insider Related Loans
4.
Forte
Oil Plc: Will Planned Divestment Unlock Value?
5.
Forte
Oil Plc Announces the Outcome of Its 39th AGM Held On May 23, 2018
6.
Shareholders
Approve Forte Oil’s Divestment Plan From Subsidiaries
7.
Forte
Oil Plc - Decent Q1’18 Numbers, AGM To Decide On Plans to Divest Subsidiaries
8.
Analysts
Advise Caution Over Forte Oil’s Announced Plans To Divest
9.
Forte
Oil To Sell Some Nigerian Assets, Exit Ghana
10. Forte
Oil Plc Obtains Exclusive Right to Distribute Chevron’s Havoline Motor Oils
11. FO
Declares N650m PAT in Q1 2019 Results; Approves Special Dividend of N1.15 per
Share (SP:N34.95k)