Forte Oil released its 2015 FY results showing profit after tax for the group rose 30% to N5.8 billion. The company also reported a 27% drop in revenue for the year as revenue dipped to N124 billion compared to N170 billion a year earlier. Here are the key highlights of this results;

Revenue

  • The company’s revenue dipped all through the four quarters of the year compared to the four quarters of 2014. Revenues average N31 billion per quarter in 2015 compared to N42 billion per quarter in 2014.
  • The dip in revenues was mostly due to a drop in volumes in its fuels segment which dropped to N104 billion compared to N170 billion in 2014.
  • Nevertheless, the company recorded a flat Gross profit margin as it recorded some savings from cost during the year. Cost of sales dropped  30% year on year compared to a revenue drop of 27%.

Operating Profit

  • Forte Oil’s operating profit dropped 31% to N4.6 billion as the company’s fought hard to reign in on expenses.
  • The company particularly recorded major increases in freight cost (up N257 million), Personnel cost (up N646million) and Foreign Exchange Loss (N690 million) respectively.
  • A huge portion of this cost was recorded in the second quarter with about N4 billion much higher than the quarterly average of N3.3 billion this year and N2.9 billion in 2014.
  • Forte oil therefore had a bad year if we decide to focus on its core operations alone. But as we already observe this was a stellar result not due to its organic operations but due to other factors.

Other Income

  • Stemming from above, the company’s earnings was mostly boosted from income generated from other ancillary businesses.
  • Other income for the group rose a whopping 190% to N4 billion compared to N1.4 billion in 2014. Interestingly, the income was evenly distributed with contributions from as many as 11 sources
  • A major portion of the income came from 4 new sources in 2015 (which were not available in 2014). Income from “accrual no longer required” contributed N300m. They were not specific on what that meant however we believe they may have been expenses which they thought they would incur and had gone ahead to expense but ended up not incurring them. It is a part of the accounting principle of being prudent in your estimates.
  • Meanwhile, N313.7 million came from income in investments in US Treasury Bills
  • Another N523.8 billion was income from disposal of assets. The company also recorded an income of N826 million which represents interest earned on dividend paid to a shareholder for shares not paid for. It claimed this arose out of a SEC ruling.
  • From all intents, it appears this was a shareholder who was allocated shares they never paid for.
  • The above incremental come were the major reasons why the company’s profits rose considerably
  • Whether these income translate to actual cash is something we will have to confirm as the review continues.

Finance cost/Income

  • Forte Oil also recorded significant gains in the area of Finance Expenses, saving over N1 billion the financial year under review.
  • According the company it reported a finance expense of N1.6 billion 21% lower than the N2.1 billion it reported a year earlier.
  • A closer look at the interest paid each quarter of this year compared to 2014 reveals the company paid an average net interest expense of N419 million compared to N533 million in 2014.
  • A major contributory factor here was the second quarter of 2015 were it reported an interest income of N1.1 billion. According to the company, this arose from interest received from the PPPRA over delayed subsidy payments in 2013 and 2014 respectively.
  • Forte Oil still has total debts of  about N37.9 billion and may not enjoy this sort of interest savings this year except it continues to reduce the debt.
  • Debt to equity (including minority interest) is currently 83%.  Worthy to note that the Group collected an N11 billion loan out of which N3.3 billion has Forte as the direct obligor. The balance was from Amperion its subsidiary which owns Geregu Power Plant

Cash flow status

  • Forte Oil has about N11.7 billion in the bank out of which N10.2 billion are overdrafts. This leaves about N1.4 billion in cash. Forte Oil by the way as a market cap of N377 billion given a valuation to cash multiple of 269X.
  • Forte also generated cash from operations of N12.7 billion during the year compared to 2.1billion the year before. The company’s Ebitda also remained in the region of N10 billion for the year
  • As mentioned, Forte received significant cash during the year from the government from subsidy reimbursements. The company received N18.7 billion from its trade receivables during the period as well.
  • The company already committed $83m in the overhaul of its 138 MW Geregu Power plant and has spent about $51 million already
  • More spending is required in 2016 and we won’t be surprised if they company embarks on a public offer or rights issue.

Valuation

  • Forte Oil is currently priced at about N297 and is valued between N377 billion to N390 billion based on that market share.
  • The share price represents a price earnings multiple of 90x and about 29x book value
  • It has also declared a dividend per share of N3.45kobo which indicates a dividend yield of about 1.1%.
  • We don’t understand why it is paying dividends considering its capital obligations. However, some believe it has to pay dividends to compensate for its lofty valuations which do not necessarily come with a robust top line or sustainable bottom line earnings growth.
  • These fundamentals firmly puts the share price in the over valued range as it has been for years now.
  • However, Forte Oil has defied all odds and has proven that its value is more driven by ‘technicals’ natural or unnatural. We will not bet against the price rising further on the back if this result.

 

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