[upme_private]Forte Oil Plc (FO:NL) released its 2013 H1 results showing a 20% rise in revenues this half year compared to last. The company posted a revenue of N59.9billion at the end of its half year ending June 30 2013. Despite this increase, Gross profit dropped YoY to N5.7billion as cost of sales rose from N43billion compared to N54billion. Operating profit at the end of the period was N1.1billion (2012 H1: N1.4billion). The company ended the period with a strong pre-tax profit rising 56.5% to N1.6billion.
- Gross profit Margin dropped this period by 28% compared to the prior year. This basically wiped out the gains obtained from the 21% rise in revenue
- The recent increase in revenue of 20% is a reversal from a back to back periodic comparative drop in revenues. The company revenues still dropped by 6% as recent as last quarter.
- A look at the company’s trade & other receivables as well as trade payable reveals a worrying permutation for me. The company’s receivables increased by N5.5billion. From a high of N20.3billion in 2011 the company reduced its receivables to N13billion in 2012, only for it to start rising again in the first six months of this year. Trade receivables now stands at N18.5billion. This makes one suspect the nature of those debts and whether they are recoverable.
- One also wonders if revenues are recognised too early considering how long it takes to recover debts. IFRS comes to mind.
- Trade payables also ballooned from N21billion a year ago to N40.6billion at the end of June 2013. This as well suggest the company’s revenue is almost entirely been financed by it’s suppliers.
- About June this year, newspaper sources reported Forte Oil was one of those who received payout of outstanding balances from the Government. Apparently, this hasn’t reduced receivables neither has it reduced payables.
- The increase in receivables and payables both suggest the company is not only trading on thin margins but is at an insolvency fault line. The N17billion or so in negative working capital is a pointer to that effect
- On a positive note, the company’s effort to bring down operating expense has continued to yield fruits following a 12% decline in operating cost. Income from other sources also helped push pre-tax profits to 56% above the prior year balance.
- However despite the cut in operating expense it still chalked off 79% of Gross Profit as against 78% in the prior year.
- Net Finance cost also dropped to N320million as the company continues to reign in on debts.
- Profit after tax of N1.3billion mathematically keeps it short from reaching its PAT target of N3billion forecasted for the end of this financial year.
- With a negative reserve still astronomically high at N53,5billion, the company will need to aim much high to be able to attain a dividend paying status.
- The company also recently announced plans to go upstream following the registration of a new subsidiary. How that will be funded is left to be seen. But drawing from their past acquisitions, the Company has mostly funded new acquisitions through funds provided by technical partners. For example, they were part of the Amperion Consortium, the preferred bidder for one of the power discos
- Return on Equity of 18% for this half year is very flattering. If you consider the effect the huge negative reserves have on shareholders funds then its easy to note that return in a negligible metric.
- Despite the seemingly weak fundamentals, Forte Oil share price has risen 288% over the last one year. Share price (blog time) is currently N43.82 more than double from N17 just a month ago.
- It’s strange one of the reasons given for the increase in their share price was the announcement by the government that they will be paying part of their outstanding receivables.
- At the above share price, their P.E ratio is now at 50x. This is just one of those market valuations that leans credence to a market heading for a crash
- Forte Oil is not on my radar and is not a stock I am hoping to buy any time soon.
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Forte Oil Plc released its 2013 H1 results in the website of the NSE[/upme_private]