Forte Oil Plc (formerly AP) has announced profitability for the year ended December 2012. The company posted a profit after tax of N1billion reversing its last year loss of N10.8billion. This is despite a drop in revenue from N117billion in 2011 to N90.9billion at the end of December 2012. Operating profit also turned positive during the year reversing the N9.8billion loss in 2011 to N2.8billion in 2012. So how was this possible despite a dip in revenue?
Opinion about the result
The company was able to achieve profitably despite a dip in revenue growth year on year by simply reducing overheads and direct cost. They were able to save an amazing N39billion in cost over last years expenditure helping them turn into profitability. That is a remarkable feat in under one year and it will be interesting to see how this was achieved when they release their annual report. But the result, however impressive still leaves loads of concern for me especially on the balance sheet side. Total loans have increased from about N9.3billion to about N13billion in just one year!! Overdrafts make up a huge chunk of this rising 55% year on year.
The company is also not generating enough organic cash from operations to cater for investments and repayment of loans. For example, whilst it generated N1.9billion in operating cash flow, it spent N3.3billion in investments and another N1.8billion in net loan repayments. It is easy to infer that the company currently cannot repay it loans as it stands. Negative working capital was also N9.8billion (2011:N8.2billion negative) as they grapple with huge trade creditors.
Whilst they have done well with cutting cost drastically, SG&A slicing off 77% of Gross Profit is still a put off for me for any business. At the end of the first half of 2012 the industry average was about 76.5% with the likes of OANDO posting 63% and total 67%. More can be done here I believe.
Is the stock worth buying
Currently the company has a negative retained earnings of about N53.8billion. This means for them to be able to pay dividends some day, they will have to make enough profits in excess of N54billion. They could also seek SEC approval to set of their share premium of about N62billion to pay this off thus wiping out almost N55billion in share capital. For me this option will be logical if current fundamentals justify their path to financial integrity. One year’s result is not enough for me to believe that is happening anytime soon.
In typical Nigerian fashion though, their share prices has traded positively over the last year rising 28% year on year to about N13.65. This will give it a premium of 15.6 over its current earnings per share. Expensive in my view! Book Value per share is currently N7 meaning the share price has a N6.6 premium over its net assets. Now this in most cases is an indication of a cheap stock, however, their negative reserves and poor debt to equity ratio is enough to send shivers down my spine. Clearly one could make a case for a share price of about N17 as its ideal value (based on Ebita multiples) but that would be on the assumption that profitability will continue amidst declining revenue and more cost cutting.
I am no optimist when it comes to valuing stocks making me pit a price of about N8 as a buy proposition.
Forte Oil 2012 Audited Accounts can be found on the website of the NSE