Forte Oil released its 2015 Q1 results last week showing earnings per share dropped 65% to 26kobo per share. The share price closed the week at N204 dropping from its week high of N215.
Revenue
- Forte declared a revenue of N33billion and a 4.9% drop year on year.
- The drop in revenue was mostly from its Fuels segment dropping 9% to N27.7billion.
- Revenue from Power generation continues to contribute significantly to group revenues topping N2.4billion this quarter (2014 Q1 N2.3billion).
Gross Profit
- Forte recorded a gross profit of N4billion indicating a gross profit margin of 12.3% compared to 13.3% a year earlier.
- Gross profit from fuels was just N574 million out of a revenue of N27.7billion.
- In other words the company spent N98 on cost of sales for every N100 of revenue from fuel.
- Remarkably N2.4billion out of the N4billion declared as profits was from Power Generation.
- The company does not recognise cost of sale for power generation, which is rather strange considering IFRS requirements.
Operating expenses
- Opex stayed relatively flat year on year with expense hikes in some items neutralized by savings in some other areas.
- The company therefore was able to maintain opex at N2.4billlion.
- For example, whilst the company incurred a foreign exchange loss of N175billion depreciation cost dropped from N791billion to N366billion.
- Interesting to note that the company spent N57million on internet cost for the quarter.
Finance cost
- Forte oil recorded a net finance cost of N658.2million compared to N480.4million same period last year.
- In fact, Finance cost alone was N952million and only reduced after set off with N294million from finance income.
- Forte currently owes about N38.5billion in debts and could continue to see net finance cost increase in subsequent quarters.
- They also have a net working capital of just N109million suggesting very little buffer in terms of using organic cash flow to repay its debts.
- About N12billion of the loans was borrowed by its Power subsidiary
- Forte may need to raise fresh capital to repay some these loans considering how unsustainable it is.
Earnings per share
- Forte declared a profit after tax of N780.8million, a 29% drop from a year earlier.
- Interesting aspect of that result shows N501.4million or 64% belongs to “Non controlling Interest” (NCI).
- NCI are investors in a join venture with Forte and are not shareholders of Forte. It is like minority interest except that they may have majority interest but not control of the company,
- This means Forte shareholders only earned N279million in Q1. As such their earnings per share was 26kobo compared to 75 kobo a year earlier
Share price
- Forte posted an annual EPS of N2.20 in 2014. At a current price of N204 that gives the stock a price earnings multiple of 92.7X
- In fact the price to book ratio is over 21x. As the market gives the stock a market capitalisation of N266billion even though its equity book value (less NCI) of just N12.7billion.
- With a P/E of over 97x and revenues and earnings per share showing no growth consistency, we believe the stock in purely overvalued.
- Sure revenue growth was up 32% but we don’t see them improving bottom line at a growth pace that should justify such valuations.
- EPS dropped 49% in YoY in 2014 and could drop even further this year with rising debts and weaker margins from its downstream sector
- Raising equity could even hurt EPS further if the effect of dilution is not set off positively against interest savings
- We feel the current share price has no correlation to its fundamentals.
- Certainly, raising fresh capital at such high valuations can only benefit the company more than it would shareholders.
Disclosure – Nairametrics and the author of this article does not own shares in Forte Oil Plc and does not plan to buy shares in Forte Oil Plc in the next one week. The author of this article wrote it themselves, and did not write this article on behalf of Forte Oil Plc, its associates or representatives. The article is purely their opinion.
