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FORTE OIL PLC 9M'19 Earnings - Tough business climate overshadows cost efficiency

FORTE OIL PLC  - Tough business climate overshadows cost efficiency

Fuel and lubes operations advance q/q

Although Q3 is traditionally the weakest quarter for the downstream players, FO’s fuel sales climbed 1.2% q/q and 23% y/y to ₦36.4 billion, in line with our expectation for the quarter. We attribute the growth in turnover to the firm’s aggressive drive to strengthen its presence in Nigeria’s downstream industry. Looking ahead, we foresee further improvement in fuel turnover to ₦37.1 billion (+2% q/q) in Q4’19, a reflection of anticipated higher consumer demand in December festive season. Accordingly, we expect FY’19 fuel sales to come in at ₦147.8 billion, indicating a 22% rise from the previous year. Elsewhere, lubricant sales grew 2% q/q and 29% y/y to ₦4.4 billion (Vetiva estimate: ₦4.3 billion), lifting 9M’19 lubes sales to ₦12.8 billion (+27% y/y). Akin to our expectation for the fuel business, we envisage a 2% q/q growth in lubricant sales to ₦4.5 billion in Q4’19, culminating in a FY’19 projection of ₦17.3 billion (+26% y/y).

Posts losses in Q3 despite better cost management

Evidently, FO recorded considerable improvement in cost management in Q3’19, as operating expenses declined 32% q/q to ₦2.2 billion, following a sizable drop in administrative costs (down 39% q/q). Also, in a bid to tame finance charges, FO significantly downsized its debt portfolio from ₦15.7 billion in H1’19 to ₦8.3 billion in Q3’19, resulting in a 26% q/q fall in finance costs to ₦598 million. Despite the improvement mentioned above, FO recorded an after-tax loss of ₦191 million in Q3’19, as the firm remains shackled by the harsh downstream climate, where lean margins continue to erode the profitability of oil marketers. For context, 9M’19 gross margin came in at 6.6%, indicating a sharp drop from 11.7% in FY’17, when the Nigerian National Petroleum Corporation (NNPC) emerged as the sole importer of regulated petroleum products.