Forte Oil Plc: Highly Inflammable?
- In contrast to sector peers, which had a stellar 2016 performance, Forte Oil (FO) grappled with impact of NGN depreciation on dollar loans linked to its power plant and an elevated bill from the taxman. Earnings halved from 2015 levels and FO did not declare dividend. In response, the stock was heavily sold off by investors (-29.9% YTD, -81.1% over 52-week). Irrespective, current adjustments to earnings guides our rating upgrade to a NEUTRAL (from SELL).
- Specifically, our rating reflects the potential upside in the LPG and lubricants segments, hinged on higher prices and volumes, as well as tax rate normalization, and gross margin recovery in its power business. Pertinently, we expect to see weighty YoY upside in Q1 2017. We particularly like FO’s market positioning—closest rival to market leader, Total—in key petroleum products and the high margin lubricants market, which will be supportive for earnings. In addition, while we forecast a 100bps market share gain from inorganic growth, our view on input cost pressure and PMS volume contraction—which drove underlying weakness in FY 16 numbers—guides our tapered optimism on earnings for 2017.
- Over 2017, we believe, in addition to price increase across its higher margin business (LPG and lubricants), sturdy growth in volumes in these segments and improved performance at the power business are key drivers to earnings. Precisely, our expectation of flattish PMS margins as well as rise in finance cost underpins our expectation for 27% contraction in EPS to N1.93. We therefore cut our FVE by 45% to N61.44.
