Forte Oil Plc: lower returns expected

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By Folakemi Emem-Akpan

Introduction

Our analysis of Forte Oil’s recent financial reports shows that it was not as adversely affected by Nigeria’s economic recession as some other companies were in 2015, being able to implement a cost-efficiency policy. It was able to turn out a decent profit in 2015, and profitability ratios for the period improved, as did investor compensation.

We however predict that the 2016 financial year will not be as profitable for Forte Oil and by extension its shareholders as 2015 was. Its financial performance for the nine months already documented out of 2016, it was unable to drive cost of sales down. Cost of sales increased, as did finance cost and income tax expense. Profit for the period was significantly lower than that of 2015, and it will be difficult for the company to re-engineer the necessary change back to clear profitability when its financials for the last quarter of 2016 are released.

Shareholders should expect a lower dividend than the one they received in 2015.

Core operations

For the 2015 operational year, Forte Oil earned significantly less income than it did in 2014. Revenue for the year was N124.6 billion, more than a quarter lower than the N170.1 billion recorded in 2014. Mr. Femi Otedola, chairman of the oil company, said the company, while continuing to weather Nigeria’s challenging operating headwinds, was not totally insulated from the fallout and shocks in the downstream sub-sector. He added that subsidy exposure through reduced importation of petroleum products for 2015 financial year saw to the revenue drop.

The company was however careful to keep the cost of sales expended to make the gross earnings as low as possible. It was therefore able to make a profit of N5.8 billion, 30 per cent better than that of the preceding year.

During the course of the year, the company had fewer liabilities than it did in 2014, worked with total assets valued 12.5 per cent less than that of 2014. Its shareholders’ funds for the period under review was however slightly higher than that of the prior year.

Earnings per share, at 411 kobo, was significantly higher than the 220 kobo of 2014. Shareholders also had a reason to smile because dividend per share was a whopping 345 kobo, much higher than the 250 kobo per share they received in 2014.

Profitability ratios

As previously mentioned, Forte Oil recorded a lower gross earnings (when compared with that of 2014), and a higher profit (when also so compared). The interaction of these two led to a better profit margin for the year. At 5.6 per cent, profit margin was better than the 3.5 per cent of 2015. Analysis shows that the company was able to make a profit of N5.60 from every N100 sales made in 2015, higher and better than N3.50 in 2014.

While total assets deployed decreased in value during the course of the year, it earned more than it did in the prior year. Return on assets (ROA) for the year stood at 5.7 per cent in 2015, better than 4.3 per cent in 2014.

Return on equity (ROE) for the 2015 financial year was also better than that of 2014. At 12.5 per cent (as compared to 10.2 per cent in 2014), the company made an after-tax profit of N12.50 for every N100 equity deployed.

During the course of the year, the company’s employee number only increased by 1 person. Earnings per employee declined to N537.1 million on the average, down from N736.4 million in 2014. While there was a decline, the result achieved is easily the highest in the Nigerian workforce, and is very commendable. Forte Oil is a company that has a small number of employees (232 as at the end of 2015), but is highly efficient and effective in employee productivity.

Other ratios

At 74.6 per cent, the company’s capital adequacy remained high during the course of the year, but not as high as that of 2014 (77.7 per cent). The still high result is an indication that the company’s financial strength in the long-term is relatively solid.

A common feature of the manufacturing industry for the 2015 financial year is that most companies had high current ratios that exceeded one point, meaning that they had the ability to meet short-term liabilities exclusively from short-term assets. Forte Oil Africa was one of the exceptions, having a current ratio of 0.95 times, as compared to 1.0 times in 2014. This 0.95 result is however high enough for the company to still be considered sufficiently liquid.

For the year under review, the company had a debt to equity ratio of 1.63, and this falls within the acceptable range for manufacturing, services and sales companies. The debt to equity ratio shows that the company is using N1.63 of liabilities in addition to each N1.00 of stockholders equity. In other words, the company is using N2.63 of total capital for every N1.00 of equity capital.

Sustainable growth

For the review year, the company had a distributable profit of N5.79 billion and retained only N2 billion out of that, dedicating the remaining to dividend. The company has been diligent with dividend payment for the past three years, and 2015’s dividend of N3.45 per share was quite commendable.

Forte Oil had a sustainable growth rate of 5.3 per cent in 2015, same as it did in 2014, meaning that it could only grow by 5.3 per cent without running into financing problems. Instead of experiencing a growth rate, the company actually declined in terms of turnover, so it was nowhere near its growth ceiling.

Stock value

Most petroleum stocks are traditionally overpriced, and Forte Oil is not any different. On January 6 2017, the market price of Forte Oil was N80.58. While this was quite high, it is important to note that the Forte Oil stock fluctuates rapidly in price. Just three weeks ago, it sold at N116.24.

Our analysis shows that it is overpriced at its current price.  Net assets per share at N42.48 is about half of the current market price of N80.58 and therefore quite unattractive.

The company is also worth much more in the market than it is worth on paper as at now, as shown by a much higher market value as compared to its book value. While book value is N46.3 billion, current market capitalisation is a much higher N87.8  billion. This also, is not good news for the prospective investor.

What the company and by extension stock, has going for it right now is goodwill.

Unaudited results

Still being affected by Nigeria’s unraveling economy, the 2016 financial year does not look like it’s shaping up to be a great one for Forte Oil and its shareholders. The company did record a better turnover than the corresponding period in 2015, but the company had a high finance cost and paid more income tax this period than it did in 2015. Profit for the period was therefore N2.8 billion, much less than the N4.3 billion recorded in the corresponding period in 2015.

Earnings per share was lower, and this will most likely affect the level of dividend investors might receive when the audited financials for 2016 are published.

Unique strategies

The Company 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, 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 can still expect a dividend from their holdings, but perhaps not as high as that of 2015.

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