August 1, 2018/InvestmentOne Report

NIGERIA | EQUITIES | OIL & GAS | FORTE OIL PLC.

H1 2018 result highlight: Poor bottom-line performance following divestment strategy

·         Revenue; up 32.4% y/y.

·         Contraction in gross profit margin; 398bps y/y.

·         Unimpressive PBT performance; down 42.3% y/y. 

Yesterday, Forte Oil Plc released its H1 2018 result, which excluded earnings associated with its upstream services, Power Generation operations and downstream business in Ghana, due to on-going divestment plans. 

The H1 2018 result showed a weaker margin performance, which outweighed an increase in revenue, which combined to deliver a lackluster bottom line performance.

Lackluster Earnings Drag PBT Downwards

Revenue growth (32.4%) was largely driven by a rise in fuel sales, which constitutes the lion share of its proceeds, and lubrication sales. Turnover generated from its discontinued operations accounted for N21.8 billion, which represents 26% of total revenue. 

However, there appear to have been cost pressures in H1 2018, which could have been the result of higher oil prices combined with the inability to import independently. As a result, we saw gross profit margin contract by 398bps y/y to 9.19% in H1 2018. This dragged gross profit down by 7.6%y/y despite the improvement in topline. 

Weaker margin and higher opex/sales ratio (6.35% in H1 2018 against 8.26% in H1 2017) more than offset the reduction in net finance cost (-15.6% y/y) as PBT fell by 42.3% y/y to N391million.

We highlight that net finance cost performance was due to a notable decrease in interest expense on bank loans and overdrafts (23% y/y), reflecting a decrease in loans and borrowings by 178% y/y.

Outlook

Going forward, we do not see any impetus for grossly improved earnings from the downstream company, given the Board’s decision in May 2018 to divest from some of its businesses, given the inability to import petroleum products independently.   

The company announced its strategy to focus on its downstream marketing business, particularly gearing towards a probable deregulation of the sector after the completion of refinery projects in the country.  

Following its divestment from segments representing 62% of its assets,  classified as ‘held for sale’ in its statement of financial position, the company’s gross profit margin printed 660bps lower than with the inclusion of discontinued operations. This was majorly affiliated with the comparatively attractive margins its power business delivers. 

Nonetheless, we believe the company’s plans to scale up its fuel business following its ‘suspended’ rights issue last year and proceeds from the sale of existing businesses should provide some respite for the company in the foreseeable future. 

However, with the earliest completion date for the Dangote refinery set at 2020, we opine that the deregulation process might not be actualized in the near future. Nonetheless, we believe the company may be perfectly placed to take advantage of such developments in the long term. 

In the near term, although Forte Oil is constrained by its inability to import PMS or control prices, we expect the company to see support from the NNPC’s drive to increase the availability of petroleum products despite the administration’s unwillingness to alter the currently unfavorable PMS pricing template.