Forte Oil Plc: Better times ahead

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Introduction

We predict that the 2017 financial year will be a more profitable one for Forte Oil (and by extension its shareholders) than 2016 was. In 2016, it was unable to control its administrative and finance costs, but still managed to turn out a profit, even though such a profit was lower than the one it recorded in 2015.  It did not declare a dividend.

Available results from its 2017 quarter one operations shows that 2017 may end on a better note for the company and its shareholders than 2016 did. But this is only if the company is able to maintain this momentum to the end of the year.

 

Core operations

Forte Oil did not have a very good year in 2016 operation-wise, as was the case with many other companies in Nigeria. It made more revenue from operations (when compared with 2015), and turnover for the year grew by 19.3 per cent to N148.6 billion. This higher turnover was achieved despite the fact that the Nigerian economy and the business environment remained challenging with both monetary and fiscal pressures significantly impacting business activities and economic growth during the financial year.

The company was unable to cut down on cost of sales, administrative expenses and finance cost. Because of this, it had a lower profit in 2016 than it did in the preceding year. Pre-tax profit was N5.3 billion, 24.3 per cent lower than that of the prior year. After-tax profit was also 50 per cent lower than what was recorded in 2015, ending at N2.9 billion.

Earnings per share, was predictably lower than that of the prior year. At N1.99, the EPS was 51.6 per cent lower than the N4.11 recorded before. There was no dividend declared for shareholders for 2016, as compared to the N3.45 dividend paid in 2015.

 

Profitability ratios

Because of a lower profit as compared to a higher revenue, profitability ratios took a dip during the course of the year. For the year, it recorded a profit margin of 3.6 per cent, lower than 5.6 per cent in 2015.. Analysis shows that for every N100 earned by the company in the course of the year, it recorded a profit of N3.60, as compared to a profit of N5.60 in the preceding year.

Assets deployed also fetched a lower profit in 2016, when compared with 2015. Return on assets for the year stood at 3.8 per cent in 2016, as compared to a return on assets of 5.7 per cent in 2015. The same was the case for return on equity.

For the 2016 financial year, Forte Oil deployed equity valued at N43.3 billion and for every N100 equity deployed, the company made an after-tax profit of N6.70, a decline from the profit of N12.50 made in 2015.

Perhaps because of the harsher Nigerian economic climate, the company employed fewer employees during the course of the year and its employee number decreased to 217 from 232. Earnings per employee then improved to N684.8 million on the average, up from N537.1 million in 2015. This is indicative of employee productivity and company efficiency.

 

Other ratios

Forte Oil’ shareholders’ funds could finance 60.6 per cent of its total capital for its 2016 financial year. While this was lower than the 74.6 per cent recorded in 2015, it still fell within the range of the industry standard for the period under review.

A common feature of the manufacturing industry for the 2016 financial year is that most companies had high current ratios, having the ability to meet short term liabilities with short term assets. Forte Oil was followed the rule with a current ratio of 1.0 times.

Having a debt to equity ratio of 2.2 shows that the company is using N2.2 of liabilities in addition to each N1.00 of stockholders equity. In other words, the company is using N3.20 of total capital for every N1.00 of equity capital. This was a little lower than what was obtainable in the industry for 2016.

 

Sustainable growth

For the review year, the company recorded a profit of N2.9 billion, but chose not to declare a dividend, retaining all earnings. Thus, retention ratio was 1. Profit margin was 3.6 per cent, lower than 5.6 per cent in 2015.

With an asset turnover of 1.1 times and assets/equity ratio of 3.3 times, the oil company had a sustainable growth of 12.2 per cent, higher than 5.3 per cent in the prior year. This means that the company’s inherent capacity for growth improved during the course of the year.

The company however recorded an actual growth of 19.3 per cent, a marked departure from the decline it recorded in 2015.

Sustainable growth for the year was lower than actual growth, and this means that the company overshot its potential.

 

Stock value

On June 30 2017, the market price of Forte Oil was N50.07, and this is currently one of the more expensive stocks on the Nigerian Stock Exchange (NSE). Analysis shows the stock is typically overvalued at that price, as most petroleum stocks are. Our analysis however further shows that the overvaluation was slight.

While book value is N43.3 billion, current market capitalisation is a higher N65.1 billion. This is a sign of overvaluation.

This is an expensive stock, and might not be an easy buy for prospective investors due to the large capital outlay that may be involved. For investors who have the wherewithal however, we recommend a buy despite the overvaluation.

The share price had very well exceeded N50.07 in the past, and we expect that it still will after a while.

 

Unaudited results

The 2017 financial year looks like it’s shaping up to be a great one for Forte Oil and its shareholders. For its quarter one results, it did record a slightly lower turnover than the corresponding period in 2016, but the company had a better profit. Profit for the period was N1.8 billion, a hundred per cent improvement over the N900 million recorded in the corresponding period in 2016.

Earnings per share improved to 54 kobo during the period, higher than 51 kobo in 2016. This might mean a dividend for shareholders come year end, should this growth trend continue.

 

Unique strategies

Forte Oil is a major marketer of refined petroleum products, and has distinguished itself from the rest by having  a strong presence in all 36 States of Nigeria and the Federal Capital Territory of Abuja. After its acquisition by  Zenon in 2010, the company began a 3 year restructuring programme of its operations and the incorporation of sustainable growth strategies and policies to continuously improve on its operations and deliver prompt quality and effective services to customers and all stakeholders.

 

 

Conclusion

Investors may expect a dividend from their holdings come year end 2017, and they will also do well to hold on to their investments in hopes of capital gains and appreciation.

*Source: Forte Oil’s 2016 financial report

*Forte Oil’s 2017 first quarter unaudited results

*The Nigerian Stock Exchange

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