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Forte Oil PLC - Decent Q1'18 numbers, plans to divest subsidiaries

Decent Q1’18 numbers, plans to divest subsidiaries                                                                      

FO’s Q1’18 numbers were quite decent, beating our estimates across most line items. Meanwhile, the mixed performance across the company’s business segments persisted in Q1’18. Despite reporting an impressive 14% y/y increase in Revenue to ₦25.8 billion (Vetiva: ₦20.7 billion), the Fuel Retailing segment (largest segment – accounts for 65% of group revenue) reported a 29% y/y decline in Gross Profit (₦1.9 billion vs. Vetiva: ₦2.1 billion) as the tough operating environment in the petroleum downstream sector continued to pressure margins. Performance of the Production Chemicals segment (smallest segment – accounts for c.1% of revenue) was also weak, reporting a 16% y/y decline in Gross Profit to ₦0.2 billion following a 17% y/y Revenue decline. Bucking the trend however, the Lubricant & Grease segment (9% of Revenue and 3rd largest segment) reported a 16% y/y increase in Gross Profit to ₦0.7 billion amidst a 7% Revenue growth to ₦3.5 billion. Also, the Power Generation segment (2nd largest segment – accounting for 25% Revenue) remained the key driver of earnings growth, reporting a 72% y/y increase in Gross Profit to ₦4.1 billion (Vetiva: ₦3.5 billion) on the back of a strong topline performance (up 54% to ₦10.1 billion).

Our long-term outlook on FO has changed significantly following the plan to divest all its subsidiaries. Post-divestment, FO will transform from running an integrated energy model to a slimmer business model focused on petroleum products retailing on a larger scale. We revise our FY’18 PAT to ₦7.7 billion (Previous: ₦6.4 billion) amidst revision to FY’18 revenue estimate to ₦154.1 billion (Previous: ₦138.6 billion), Net finance expense to ₦6.4 billion (Previous: ₦4.9 billion) and FY’18 tax rate assumption to 20% (Previous: 28%). Notwithstanding our higher revisions to earnings, our target price is reduced to ₦77.75 (Previous: ₦83.57), largely weighed by dimmer outlook on FO’s operating cashflow and increasing working capital need. We have also placed the stock on a HOLD recommendation pending further clarity on the planned divestments.