Last week, Forte Oil informed the investing public of its decision to sell off its upstream and Ghanaian units, as well as its stake in the Geregu power plant.
The company attributed its decision to a need to focus on the downstream segment. The move is however subject to the approval of shareholders at its forthcoming 39th Annual General Meeting.
Forte Oil share price is down 20% in the last one year and about 6% year to date. Since this announcement, the share price has dropped from a year high N47 to N40 suggesting that the market may not have been impressed by the move to spin of upstream and power segment of its business operations.
Ghanaian operations are minuscule
Ghanaian operations have been insignificant at both the top and bottom lines. AP Oil and Gas Ghana accounted for just 0.9% of the Group’s revenues of N148.6 billion in 2016 and 3.6% of Group revenues of N129.4 billion in 2017.
Bottom line contributions are even far smaller. The Ghanaian segment made a loss before tax of N59 million in 2016, and a profit before tax of just N29 million in 2017.
Forte made an equity investment of N670 million in AP Oil and Gas Ghana, in addition to cumulative preference shares worth N424.9 million.
Prior to the decision to put the Ghanaian subsidiary on sale, the company had taken several impairments on its investment. Impairments of N547 million were taken in 2016 and N410 million in 2017 respectively.
Selling off Geregu power plant is puzzling
While the decision to sell its Ghanaian unit makes sense, offloading its stake in Geregu is quite puzzling. Forte Oil prides itself as the leading integrated energy company in the country. Also, gross profit margins from Geregu has been impressive, at between 35% and 40%.
- Forte owns 57% of Amperion Power Distribution Limited, BSG Resources Limited owns 38%, while Shangai Municipal Electric Power Company (SMEPC) has a 5% stake.
- Amperion Power Distribution Limited, in turn, owns 51% of Geregu Power Plc. In effect, Forte owns about 29% of Geregu Power Plc.
- Amperion completed the acquisition of a majority stake in the Geregu Power plant for $132 million in August 2013. The company has since invested funds into rehabilitation of the plant.
- Like fuel, an increase in electricity tariffs is almost inevitable, most likely after the elections. All variables used to calculate the current rates have since gone up.
Having invested so much in the plant’s rehabilitation and in view of the potentials the industry has, Forte selling its stake comes across as contrarian.
A buyer won’t come easy
Nigeria’s power sector has struggled with various issues ranging from poor collection rates, to tariffs that are not cost-effective, and an absence of metered customers.
- This has cascaded from the final consumer to the GENCOs. Getting a buyer for its stake In Geregu may take some time.
- The prospective buyer would also have to assume responsibility for the loans guaranteed by Forte Oil Plc.
As at the 3 months ended March 2018, the Group had a long-term loan of N11.4 billion for its acquisition of the Geregu Plant through Amperion.
The case for downstream
Forte has one of the largest networks of petrol stations in the country. In a country of over 120 million people, many are dependent on petrol for running their cars and generating sets; this serves as an advantage.
- Also, as a means of diversifying its revenue base, Forte recently announced that it had obtained the distributorship rights for the Havoline line of lubricants.
- Interesting to note that Forte Oil’s revenue from its downstream division has been on the decline in the last three years. Revenue has dropped from N152 billion in 2015 to N121 billion (restated) and N78.8 billion in 2016 and 2017 respectively.
- The drop is largely attributed to its volume declines as NNPC remains the sole importer of fuels in the country.
- By focussing on downstream only, analysts suggest Forte Oil is positioning itself ahead of the commencement of operations of the Dangote Refinery as well as other smaller modular operations currently being constructed across the country.
Last year, the MD/CEO of Forte Oil Mr. Akin Akinfemiwa, announced Forte Oil was in talks with a major refinery to “form a strategic partnership for local refining of petroleum products in Africa’s top oil exporter”
Forte Oil is a market leader when it comes to downstream operations and while fuel subsidy still persists they perhaps believe this won’t be sustained. If fuel subsidy is removed, margins could improve for a sector that has relied on volumes and government handouts to survive.
There is also lubricants and diesel and other by-products where subsidy no longer exists. Forte Oil recently acquired rights to distribute Chevron’s Havoline Motor Oil which is expected to help boost its Lubricants and Greases division valued at about N12 billion.
Against sole reliance on downstream earnings
Petrol prices remain heavily regulated by the Federal Government through the Nigerian National Petroleum Corporation (NNPC). The Buhari administration in 2015 increased the pump price of petrol from N86.50 to N145 per litre.
- A combination of the depreciation of the naira against the dollar, as well as rising crude oil prices, mean that petrol landing prices have since gone up. The government has however been reluctant to increase pump prices once more to avoid a populist backlash.
- This has left the NNPC as the sole importer, even as it racks huge losses. The government has also been reluctant to use the term, ‘subsidy’ preferring to call it an under recovery.
- Downstream players continue to be owed by the Government through the PPPRA. Q1 2018 results by the company show that it is owed N18.8 billion by the Petroleum Support Fund (PSF).
Post-May 2019, the government could decide to increase pump prices again, to enable major marketers to begin importing again. Till then, most downstream players will continue to struggle.
Forte’s strategy may not deliver returns in the near to medium term but will pay off were the government to fully deregulate the downstream sector.
While Nigeria is much closer to that, no one knows exactly when it will take place. The Buhari administration has doggedly stood against the removal of fuel subsidy, against advice from policy observers.
However, with oil price racing above $70 and predicted to hit $100 it is unlikely that the government will continue to tow this line. Fuel subsidy could be removed after the election in 2019, paving the way for Forte Oil to perhaps win in the battle for the downstream sector.
GlaxoSmithKline in big trouble as losses mount
The results were less than impressive with several key indicators showing a year-on-year decline.
GlaxoSmithKline Consumer Nigeria Plc (“GSK Plc” or “the Company”) is a public limited liability company with 46.4% of the shares of the Company held by Setfirst Limited and Smithkline Beecham Limited (both incorporated in the United Kingdom), and 53.6% held by Nigerian shareholders.
The ultimate parent and controlling party is GlaxoSmithKline Plc, United Kingdom (GSK Plc UK). The parent company controls GSK Plc through Setfirst Limited and SmithKline Beecham Limited.
The Company recently published its unaudited first quarter (Q1) 2021 consolidated financial statements for the period ended 31 March 2021.
The results were less than impressive with several key indicators showing a year-on-year decline. For example, Group revenue (turnover) declined from ₦4.99 billion in Q1 2020 to ₦3.46 billion in Q1 2021 a drop of over 30.66%. The revenue drop was due to a sharp decline in the local sale of its healthcare products.
Total loss after tax as of Q1 2021 was ₦238.07 million compared to a profit after tax of ₦113.47 million for the same period to Q1 2020.
The company is essentially divided into two segments viz: Consumer Healthcare and Pharmaceuticals. While the Healthcare segment was largely profitable in Q1 2021 (making a profit before tax of ₦ 8.73 million by March 31, 2021, the pharmaceuticals segment made a loss of ₦262.93 million in the same period.
The Consumer Healthcare segment of the company consists of oral health products, digestive health products, respiratory health products, pain relievers, over the counter medicines, and nutritional healthcare; while the pharmaceutical segment consists of antibacterial medicines, vaccines, and prescription drugs. While goods for the consumer healthcare segment are produced in the country, the pharmaceuticals are all imported.
The largely imported pharmaceutical products are thus exposed to the vagaries of foreign currency fluctuations coupled with a negligible to no revenue from the foreign sale of its healthcare products (same as in Q1 2020) as it barely exports its products out of the country.
The cost of importing the antibacterial, vaccines and prescription drugs, and the significant local operating expenses wiped off the marginal gross profits made by the pharmaceutical segment of the company. In effect, the gross profit of ₦508.12 million made by the pharmaceutical segment of the company was eliminated by an operating expense of ₦735.7 million and this resulted in a net loss for the pharmaceutical segment of the business.
Apart from the impact of imported pharmaceutical products as already discussed, other issues that affected the company’s Q1 2021 results and are likely to continue to affect its performance in future include:
- A limited product mix that has only the likes of Macleans and Sensodyne (Oral Healthcare); Pain relievers (Panadol and Voltaren); Digestive Health (Andrews Liver Salt); and Respiratory Health (Otrivin and Panadol Cold and Catarrh) all within the Consumer Healthcare segment.
- Increased competition, particularly from local pharmaceutical manufactures of similar over the counter medicines and other prescription medications and vaccines.
In addition, in October 2016, GSK Plc divested its drinks bottling and distribution business that manufactures and distributes Lucozade and Ribena in Nigeria, and other assets including the factory used for the drinks business to Suntory Beverage & Food Limited. The loss in revenue from these popular brands continues to impact its topline.
GlaxoSmithKline (GSK) is a global healthcare company and is well-known and acknowledged for its pioneering role in discovering and distributing vaccines for the likes of hepatitis A and B, meningitis, tetanus, influenza, rabies, typhoid, chickenpox, diphtheria, whooping cough, cervical cancer and many more.
It is also renowned for its manufacture and distribution of prescription medicines such as antibiotics and treatments for such ailments as asthma, HIV/AIDS, malaria, depression, migraines, diabetes, heart failure, and digestive disorders.
Perhaps GSK Plc’s fortunes may change if the company is able to obtain the parent company’s licence to manufacture GSK-owned vaccines and prescription medicines within the country while also exploring the possibility of extending the sale of its products outside the shores of the country.
Since different expertise is required for vaccines and prescription drug manufacture and distribution as compared to manufacture and sale of consumer healthcare products, perhaps another alternative may be for the company to create two separate companies with one company being a 100% vaccines and prescription drug pharmaceutical manufacturing and distribution company while the second company specializes entirely in the manufacture and sale of consumer healthcare products.
As a result of the Q1 2021 performance, the company’s earnings per share (EPS) dropped to -20 kobo compared to the 9 kobo earnings per share reported in Q1 2020. At the start of 2021, GSK Plc’s share price was ₦6.90 but the company has since lost over 10% of its price valuation as the company’s share price closed at ₦6.20 on April 30, 2021.
NB Plc’s share price and dividends keeping shareholders happy
It was not all hunky-dory for the company as its cost of sales jumped from N48.3 billion in Q1 2020 to N66 billion in Q1 2021.
Nigerian Breweries Plc (“NB Plc” or the “Company”) reported its first-quarter (Q1) 2021 results on April 23, 2021.
The company’s performance was impressive considering the headwinds it faced late in 2020 and early 2021 from inflationary pressures, poor consumer purchasing power, lethargic economic growth, and increase in the company’s beer prices which took effect from Q4 2020.
The company achieved a net revenue for the three months to March 31, 2021 of N105.68 billion compared to N83.23 billion for the same period to March 31, 2020 — a 27% increase compared to the Q1 2020 results.
It also achieved a N39.67 billion gross profit — a 13.7% increase in gross profit compared to Q1 2020.
Quarter-on-quarter EBITDA rose by 22.8% from N19.82 billion in Q1 2020 to N24.34 billion in Q1 2021. Other positive outcomes quarter on quarter were the increase in operating income (from N10.94 billion to N14.49 billion), profit before tax (from N8.3 billion to N11.51 billion), and profit after tax (from N5.53 billion to N7.66 billion).
It was not all hunky-dory for the company as its cost of sales (direct costs attributable to NB Plc’s production) jumped from N48.3 billion in Q1 2020 to N66 billion in Q1 2021, an increase of N17.7 billion. According to the company, its costs are subject to seasonal fluctuations as a result of weather conditions and festivities. As a result, the company’s results and volumes are dependent on the performance in the peak‐selling season, typically resulting in higher revenue and profitability in the last quarter of the year.
The total cost of sales, marketing and distribution, and administration expenses grew from N72.47 billion in Q1 2020 to N91.63 billion in Q1 2021 – a jump of 26.43%. This jump was largely attributable to the cost of raw materials and consumables which grew to N46.53 billion (compared to N30.2 billion for the same period in Q1 2020).
The raw materials cost pressure has been a trend since Q2 2020 driven by the rising commodity prices, foreign exchange devaluation and domestic inflationary pressures. As a result, the cost of the raw materials to net income ratio has continued to rise. This ratio was 36.3% in Q1 2020 but has risen to 44% in Q1 2021.
What may be a source of particular concern for the company is how well working capital is being managed from a liquidity and leverage perspective. The company reported cash and cash equivalents of N30.37 billion in Q1 2020, this had dropped to N18.43 billion by Q1 2021. In the same period, trade debtors and other receivables (i.e., those that owe the company for purchases that have not been paid for) had increased from N11.42 billion in Q1 2020 to N23.48 billion in Q1 2021, an increase of over 105% in just 12 months!
More worrying, in terms of magnitude, are trade creditors and other payables (i.e., those that the company owes payments for goods and services purchased) which grew from N139.2 billion in Q1 2020 to N145.41 billion in Q1 2021, a rise of N6.21 billion (or 4.5%) in just 12 months.
While the company’s loans and borrowings had reduced significantly (short-term loans in Q1 2021 was N35.65 billion versus N39.64 billion in Q1 2020; and long-term loans in Q1 2021 was N15.87 billion versus N51,81 billion in Q1 2020), the cost of borrowing, that is, interest expenses that the company paid on borrowed funds, rose from N2.7 billion in Q1 2020 to N3 billion in Q1 2021. This suggests that while short term and long-term borrowing have reduced, working capital needs are being refinanced at a higher cost or alternatively, most of the reduced short term or long-term borrowings have simply been restructured from longer-term loans to shorter-term overdrafts and commercial papers with a higher interest expense. The balance sheet as of Q1 2021 showed a liability in the form of bank overdraft and/or commercial papers of N21.44 billion which was not in the books in Q1 2020.
The first-quarter report also showed that as of March 31, 2021, the company had revolving credit facilities with five Nigerian banks to finance its working capital with the approved limit of the loan with each of the banks ranging from N6 billion to N15 billion (total N66 billion). N9 billion of the available amount was utilized at end of March 2021 (2020: Nil).
It should be noted that NB Plc’s financial statements for the 3 months ended 31st March 2021 are yet to be independently audited, so the results may be further improved or be worse, depending on the views and professional opinion of the external auditors in terms of accounting treatments and management judgement on significant transactions.
From the company’s numbers and explanations, the results are clearly driven by:
(1) Benefits from its increased pricing with the raised prices taking effect from December 10, 2020. The increases ranged from 5.2% to 6%, mainly on selected brands packaged in aluminium cans and on the 600-ml Star Larger returnable glass bottle.
(2) Volume growth in its premium brands (particularly Heineken) and non-alcoholic portfolio (particularly Maltina).
(3) Relative inelastic demand for its portfolio mix despite price increases, availability of substitutes, and stagnate consumer wages eroded by inflation. In economics, inelastic demand occurs when the demand for a product remains static or changes less than changes in price.
Overall, the company achieved outstanding results that would have confounded analysts’ estimates. Given continued inflationary trends and currency depreciation, it would be interesting to see whether turnover and profitability growth are sustainable over the remaining quarters of the year. On its financial year 2020 performance, the company paid a final dividend of NGN0.69 in April 2021 (interim of NGN0.25 paid in December 2020). If the trend is sustained, it can only be good news for NB Plc in terms of increases in its share price and dividends for its shareholders.
Heineken Brouwerijen B.V owns 37.73% of the company to which NB Plc pays annual technical service fees and royalties.
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