Nigeria’s leading integrated energy company, Forte Oil Plc has announced plans to offer for subscription up to N20 billion through book building. The announcement was contained in the weekly stock market newsletter issued by the Nigerian Stock Exchange.
In a move that surprised retail investors, Forte Oil revealed the offer was targeted at High Net worth Individuals (HNI) and “Qualified Institutional Investors (QII)
Forte Oil Plc Offer for Subscription of up to N20,000,000,000.00 through book building method to Qualified Institutional Investors (‘’QIIs’’) and High Net worth Individuals (‘’HNIs’’) as defined under Rule 321 of the Rules and Regulations of the Securities and Exchange Commission (‘’SEC’’). Forte
What it means
Being an offer for subscription, it appears Forte Oil is looking at selling new equity instead of a rights issue as initially expected. The offer is also targeted at select investors rather than to the general public. A N20 billion offer suggest it could be looking to sell about 333k shares based on the current price of N60 per share. At this price, current shareholders who do not partake in this offer will get diluted by at least 20%.
Why this route
Most investors had anticipated a rights issue or an offer that provided other investors to participate, however, it appears Forte may have decided to go the cautious route for a number of reasons.
As we pointed, an offer price of N60 per share appears hugely cheap, when you compare to the over N200 Mercuria paid when it purchased a 17% equity stake in September. This is perhaps why Forte Oil is using the Book Building approach to sell rather than just quoting a price close to its current market price.
A book building, is valuation approach where the price of a stock or security is determined by investors who table the price the want to buy the asset for and the quantity they want to purchase. The sum of all the orders and the value is then used to determine the average price.
Forte Oil is basically telling the market that the current price does not represent its valuation and believes its targeted investors believe so too.
Cost of raising equity
Going by the spate of recent lack luster offers in the market, it appears investors still do not have appetite for rights issues, offer for subscriptions and offers in general.
Therefore, embarking on an equity raise targeted at an investor shy public may also not be a good approach for the company thus the need to focus on limited investors with deeper pockets.
This reduces the cost associated with the raise and focuses their efforts on a group of HNI’s and QII they may have identified.
Considering that this is not an offer for sale, it is likely that Forte Oil has already located investors which it intends to sell shares to.
Being a publicly listed company, it will still have to make this deal public and via an offer for subscriptions.
The announcement signifies the commencement of the transaction and could be done and dusted in a matter of days.
Implication for shareholders
As opined, shareholders who do not participate in this offer stand to be diluted by as much as 20% if the average offer price from the book-build is anywhere in the range of N60. However, we understand Forte Oil does not expect to sell at this price, so there is a likelihood of an immediate rally.
Despite this possibility, there is risk that a lower valuation, after the book build, could reduce the share price further below the current price of N60. Also by our calculations, an average book build offer price of N100 will dilute current shareholders by 18% but will only result in a theoretical ex offer price of N62 (assuming the current share price stays at N60 at close of offer).
Forte Oil has over the years given investors value for their investment, however we maintain those days are now behind us. A major driver for Forte’s valuation will be its results and more importantly its earnings per share. In its 2016 half year interim results, Forte Oil reported an 84% rise in profits. However, its earnings per share dropped y 44% to 105 kobo denting hopes of a higher growth in earnings by the end of the year.
Forte, currently trades at a price earnings multiple of 16X, which by most measure is reflective of its valuation. If the drop in earnings per share is sustained by year end, then the current price of N60 may just be expensive in hindsight.
The company also raised about N9 billion at a rate of 17% and effective yield of 19%, via a bond offering in November 2016. The bond was mostly used to repay its loans.