Earnings Review H1: Forte Oil Thin On Profits, Thin On Cash

In a year where “oil subsidy” has dominated both the political and economic discussions, earnings expectations for oil majors in the downstream sector has been anything but robust. With margins expected to be thinner than usual any inkling of an earnings growth will be much appreciated.

Revenue

Forte Oil posted a revenue of N43b for the first half of 2012 down 19% from the same period last year. Cost of Sale was impressively down 22% from the same period last year to N36.8b. Thus despite the dip in revenue the company was able to efficiently manage its cost posting a much improved Gross Profit of N6.2b, higher than the N5.59b posted in the first half of last year. This ensured they had a Gross Profit Margin of 14%.

Operating Profit

The Company posted N4.9b in selling, general and admin expenses down 10.3% from the same period last year. SG&A as a percentage of Gross Profit was therefore 79% much better than the untenable 97% posted same period last year. Though a notable improvement, is still fall shorts of  60% operators in this industry should strive to attain. Operating profit at the end of the first half of this year was therefore N1.3b higher than the N387m obtained in the first half of 2011. Finance cost also dropped 51% to N561m in the first half of the year. However, this shouldn’t be taking too seriously as the company more than doubled its overdrafts to N15b a strong indication that interest may rise in the course of the year. The impact of this can be seen in the very low cash position of the company which has dropped by 55% to N1.3b. In fact,  cash flow from operations was a negative N9.4b with cash paid to suppliers, taxes and salaries far outweighing cash received from customers of N43b.

Profit (Earnings)

The company seems to have bucked its trends of losses by posting a profit before tax of N632m for the first half of the year. This however represents 1.5kobo for every N1 generated in revenue. This would have qualified as a disastrous result in any other clime but when you consider prior year losses, one has no choice but to encourage any attempt to reverse an incessant loss position.

Bottom Line

Forte Oil Plc seemed to have turned the corner going by this result.;But that is to be relied on by the most gullible of all investors. The estimated profits of about N612m is just a scratch on the surface of carried over losses represented by negative retained earnings of almost N54b. Surely this can be remedied by setting it off against share premium but that still provides little comfort for me considering the thin margins the company posts and may continue to post. Return on Equity of 8.6% may seem attractive considering industry average but when this is 400 basis point less than inflation, there is little incentive for any value investor. The company has mostly traded at an average price of N10 hitting a year high of N12. Volume of trade is very little giving the stock a very illiquid investment.

On the basis of their past result, it will be fool hardy not to recognize this result was a step in the right direction. For this they get a black ink