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Forte Oil PLC FY'17 - Earnings beat on strong Power performance

FO released its FY’17 results last week, reporting stronger y/y earnings growth for the Group despite mixed performances across its four business lines. Constrained by tough operating environment in the petroleum downstream sector, the company’s flagship Fuel Retailing segment (largest segment – accounts for 61% of revenue) reported a 36% y/y decline in Revenue to ₦78.8 billion, 6% worse than we expected. Revenue for the Production Chemicals segment (smallest segment – accounts for c.1% of revenue) was also down 27% y/y to ₦1.9 billion. Bucking the trend, the Lubricant & Grease segment (9% of revenue, 3rd largest) rose 6% y/y to ₦12.1 billion. The Power Generation segment (2nd largest segment – accounting for 27% Revenue) continues to post strong earnings with Revenue almost tripling y/y to ₦36.6 billion, 2% better than our estimate. Cumulatively, the Group’s Revenue was down 13% y/y to ₦129.4 billion vs. Vetiva’s estimate of ₦134.2 billion. FY’17 PAT rose over three-folds to ₦12.2 billion, well ahead of our ₦6.3 billion estimate.

Despite the bottom-line outperformance, we maintain most of our erstwhile expectations on FO’s operations for FY’18. Specifically, we remain cautious on the Fuel retailing segment as we do not foresee deregulation in the near term. Consequently, we cut the segment’s FY’18 revenue growth to 5% y/y (Previous: 10%). Also, we anticipate improved performance from the Production Chemicals and Lubricant & Grease segments amidst continuing improvement in economic activities. More importantly, we expect the power segment to continue to drive earnings in FY’18 even as we hold a cautiously optimistic view on gas supply. We therefore revise our FY'18 PAT estimate to ₦6.6 billion (Previous: ₦7.0 billion) and our target price to ₦83.57 (Previous: ₦87.04) on the back of more cautious outlook on the fuel segment.