Nigeria’s leading integrated energy company, Forte Oil Plc released its 2016 half year results showing pre-tax profits rose by a 31% to N4.2 billion on a year on year basis. Profits on a quarter on quarter basis rose by a whopping 127% to N2.9 billion.
Despite this impressive results the share price closed relatively flat at N175.5 on Friday. Nevertheless, the share price still keeps Forte oil at an earnings multiple of 38.77.
That’s a lofty valuation by all standards, especially if you consider that peers like Total, Mobil etc. all trade at multiples to earnings of 10x and below. Yet, investors should be worried when you consider that Forte Oil for years have traded at multiple to earnings of over 80x. Forte Oil traded for as high as N330 in February 2016, just 6 months ago.
We believe investors ought to be worried not necessarily about the share price but more about the fact that the company doesn’t seem to leveraging on this valuation.
Time to step up the ante
Companies typically court high valuations for their stock for the simple reason of raising capital. At a multiple of 38x Forte Oil should probably be looking at raising funds quickly enough to capture a market that is changing dramatically with the gradual deregulation of the petroleum sector.
Forte Oil competes with the likes of Oando, Mobil, Total in the downstream sector and should by now be miles ahead of the competition in terms of market share.
This can only be achieved via a strategic and aggressive expansion of its operations across the country and beyond. This can be achieved via acquisitions of more downstream assets within the petroleum marketing, storage and distribution value chain. This can only be the justification for such valuations.
Last year (October 2015), Forte Oil announced a deal that saw one of the world’s leading Oil and Gas companies acquire about 17% of the company for about $200m.
The share price was around N190 when this deal was consummated. For Forte, the private placement option may continue to remain the only logical option for the company to raise capital. Going through a public offer may turn out to be a tough ordeal considering how stretched investors are financially.
This is by no means a doubling down of our belief that the company needs to sweat that share price. Companies that trade at multiples of 30x and above reward shareholders with constant revenue growth and stronger Ebitda. It’s hard to see that happen with the current scope of their operations.
Profitability growth is not as robust as we think it should and neither dividend payment strong. If the company decides to pay out all the dividends in its retained earnings shareholders will only be getting N3 per share.
Forte’s debt to equity of 1:1 also provides it with a good reason to raise capital urgently. Interest payments are rising on a quarterly basis having risen from N500m to over N1.2 billion. We then wonder what is the point owing so much and yet failing to unlock the value placed on it by a generous market. Forte surely knows opportunities like this don’t last forever.