The Nigerian Stock Market ended a perfect month of trading on Friday gaining a whopping 6.35% pop. All the major indexes closed the month positively except the NSE Oil and Gas index which ended the month losing -0.24%.
One of the major reasons attributed for the poor performance of the NSE Oil and Gas Index is the performance of sector driver, Forte Oil Plc. Forte Oil opened at about N43 in May and closed at N46 representing a 6.9% gain for the month. Now, when you consider that other stocks like FBNH, UBA, GTB have each gained over 50% in the last one month, then indeed it has been disappointing. Despite this, investors in the stock remain bullish that the great FO rally will ensue in no time. But are any hopes of a rally over?
A look at the table below could help explain if it will or not
Forte Share Price History at the end of each year
2012 – N6.44 (Yeah high N9.51)
2013 – N90.25 (Year high N91.55)
2014 – N178.33 (Year high N208)
2015 – N286.6 (Year high N286)
2016 – N84.43 (Year high N342)
We believe incentives are key to any demand for a stock at any point in time. For investors, it’s capital gains and or dividends while for majority shareholders of these companies it’s capital gains and dividends plus consolidation of ownership. We believe in the case of Forte, the incentive here is to consolidate ownership of the stock. A cursory review of the table above buttress this thesis.
Between 2012 and 2016, Femi Otedola, the majority shareholder of Forte Oil and Chairman of the company has seen his direct and indirect holding in the stock rise from 64.8% to 96% as at the end of 2016 (we assume he also has interest in Thames Investments Incorporated). To achieve that much stake, his array of interest has steadily acquired shares from the company since 2013. From owning about 707 million units his entire interest is estimated to now own about 1.2 billion ordinary shares. This has also taken their percentage ownership from 65% to 96%. Based on this the logical question to ask is what else is there to buy? Are there anymore incentives to acquire more shares?
The answer to that question eludes us as we believe a rally could be triggered by something else beyond our modest comprehension. However, we do not believe Mr Otedola will be seeking to acquire more shares. But there is another twist.
Available data also suggest that the company’s shares has a free float of about 74% which means most of the shares are available as stock and can be sold easily on the Nigerian Stock Exchange. For that to happen, it means Mr Otedola will need to sell some of his shares to create liquidity, with the hope that it could trigger a price rally. An incentive for that would probably be a new strategic investor looking to invest in the company or a possible merger and acquisition. It’s difficult to rule out any mergers and acquisitions at the moment as Forte Oil, being the only listed integrated oil company will attract foreign investors looking to have a stake in Nigeria’s power and oil and gas sectors.
Is Forte Oil’s share price stuck?
Definitely not and two reasons explains why. Firstly, Forte Oil is still a very profitable company and has potentials to indeed increase profits. It is currently trading at a Price Earnings ratio of about 15x which is below the sector average. If the company post a double digit growth in its half year interim results then we won’t be surprised to see its share price rise to N60 representing a 20x price earnings ratio and a 27% upside based on current price.
Secondly, the fact that just less than 5% of the stock is in the hands of minority shareholders like you and I, others scrambling to get into the stock will have to pay at a premium.
In summary, the thesis above suggest any 2013-2016 type rally for Forte is over as we do not see any incentive for Mr Otedola to acquire more shares of the company at any price. However, the limited availability of the stock could attract significant gains for those who own the stock provided it’s half year results are good and perhaps declares interim dividends. But this is still a good two months away.