With a strong start to the 2017 financial year which saw its Profit Before Tax rose by 11 percent year-on-year as at H1 ’17, Nigeria’s indigenous energy firm – Forte Oil – stands a great chance of attracting foreign multinational oil firms who had always indicated interests in its business.
This optimistic view was captured in a report on the firm put together by financial advisory and investment management company, CardinalStone Partners Limited. The report took a cursory look at the company’s half year 2017 performance and also engaged the management in a conference call to arrive at this view.
Forte Oil’s earnings outlook has considerably improved following a deliberate positive shift towards higher margin business segments. Contribution to aggregate revenue from production chemicals, lubricants and power have risen to 2% (H1’16: 1%), 10% (H1’16: 6%) and 26% (H1’16: 5%) respectively whilst the fuel division has seen its contribution fall to 63% (H1’16: 88%).
The change in strategy has been positive with the firm’s return on equity improving to 10.6% in H1’17 from 6.5% in FY’16. “In our view, the improved earnings outlook could renew interest from multinational oil companies. We recall that the proposed acquisition of a 17% stake in the company by Mercuria Energy Group fell through.” CardinalStone noted.
The company has also disclosed plans to raise N20 billion capital by way of equity out of the N100 billion approved by the shareholders at its Annual General Meeting, AGM.
The offer is targeted at High Network Individuals and Institutional investors. Whilst we expect earnings per share to be diluted following the offer, we highlight some positives from the capital expansion.
According to management, proceeds from the offer will amount to N19.6 billion. 43% of the proceeds will be deployed towards working capital, 41% will be devoted to expansion works (management intends to add 40 new retail outlets annually for the next 5 years) whilst the balance will finance the automation of the lubricant facility. In our view, this provides scope for the company to expand its earnings particularly from 2018.
According to CardinalStone report, while the details on timing and price of the Offer are yet to be communicated, and assuming that the Offer is issued at FO’s 30-day VWAP (N56.90), it is estimated that a full subscription to the offer would increase FO’s outstanding shares by 33% which will translate to a post-offer target price of N73.11. This still implies a 28% upside to the 30 day VWAP of N56.90.
