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Forte Oil PLC 9M'17 Earnings - Diversified model shields earnings, PAT up 81% y/y

Diversified model shields earnings, PAT up 81% y/y                                                                      

Despite posting a 20% y/y drop in 9M’17 revenue to ₦96.9 billion, FO reported a 23% y/y growth in 9M’17 EBIT to ₦9.7 billion, lagging our estimate by 22%. The y/y growth came amidst mixed performances across FO’s four business lines. Performance of the company’s flagship Fuel Retailing segment (63% of revenue) remained subdued on persistent product sourcing challenges within the Nigerian petroleum downstream sector, dragging the segment’s revenue and gross profit 41% y/y and 40% y/y lower to ₦60.8 billion and ₦6.2 billion respectively. Gross profit from the Lubricant & Grease segment (9% of revenue, 3rd largest) was also down 40% y/y to ₦1.3 billion despite an increase in the segment’s turnover (11% y/y to ₦9.1 billion) as the relatively weaker naira kept import cost of main raw material (base oil) on the high side (Gross margin – 9M’17: 15% vs. 9M’16: 27%).                                            

With a cautious outlook on the Fuel segment, we cut our estimates across most line items through our forecast period. We revise our FY’17 revenue estimate to ₦133.7 billion (Previous: ₦145.4 billion) and revise our gross margin to 16.8% (Previous: 18.5%). Consequently, our revised FY’17E EBIT falls sharply to ₦12.5 billion (Previous: ₦17.5 billion), and our FY’17E PAT down to ₦6.2 billion (₦10.2 billion) but still implies a potential 114% y/y bottom-line growth to be driven by contribution from non-fuel segment. After updating our model, we revise our target price to ₦84.43 (Previous: ₦92.01) but maintain our BUY rating.                                                                      

Forte Oil PLC. (FO) is a foremost Nigerian integrated energy group. The Company changed its name to Forte Oil Plc in December 2010 upon restructuring and rebranding, with Zenon Petroleum and Gas Company Limited and Thames Investment Incorporated as its major shareholders. Headquartered in Lagos, Nigeria and with operations in Ghana, the Company and its subsidiaries, Forte Upstream Services Limited, AP Oil and Gas Ghana Limited and Amperion Power Distribution Limited and its subsidiary, Geregu Power Plc are collectively the Group.