Forte Oil Q3 2018: Topline Growth Supported by Increase in Revenue from Fuels

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·         Impressive Topline Performance of N32.9 billion, up 54.7% y/y.

·         Higher gross profit margin of 8.4%, up 262bps y/y.

·         Declining Opex/sales ratio of 7.4%, down 245bps y/y.

·         Loss before tax of 15 million, from a loss of N1 billion in Q3 2017.

8/11/2018/InvestmentOne Report

Last week, Forte Oil released its Q3 2018 result. The report displayed a yearly advancement in sales, in comparison to Q3 2017 as restated, following the company’s divestment plans. The performance was attributable to a rise in revenue, particularly from fuel proceeds as well as lubrication sales. Similarly, the company’s cost efficiency supported an improvement in gross profit margin, which trickled into advancement in bottom line performance, though still negative when we discount the impact of the discontinued business. 

Low Base Flatters PBT Performance

With the exclusion of upstream, power generation and downstream (Ghana) operations, topline performance improved by 54.7% y/y to print at about N33 billion in Q3 2018. This was driven by a y/y boost in the sales of the firm’s major product-fuel as well as lubricants. We believe this may be reflective of the improvement in product sourcing challenges faced by downstream companies as well as FX stability. In the same vein, better cost management supported gross profit margin, which improved by 262bps y/y to 8.42% in Q3 2018. 

Overall, a combination of the 245bps y/y fall in OPEX/sales, rise in other income to N467million from N126million in Q3 2017 and a stronger gross profit margin offset the impact of the jump in net finance cost to N819million from N293million in Q3 2017. As such, the company made a loss of N15million in Q3 2018 though it is still better than the loss of N1billion recorded in Q3 2017. 

Divestment Strategy Reveals Glaring Profitability Risks

We highlight that the abysmally low PBT recorded could be as a result of the company’s divestment strategy. This reflected in FO’s Q3 2017 PBT dropping to a loss of N1 billion from a profit N847 million after being restated in Q3 2018 report as the more profitable business segment (power) is currently classified as held for sale. 

Notably, the performance of discontinued operations in the quarter in review was relatively impressive. Despite revenue falling by about 32.6% y/y, PBT margin inched up by 16bps to 20.3%. We believe the lower turnover could be as a result of the intention of the company to sell this business line. As such, less productive activities might have been done in this business line.

Benefits of Operating Efficiency Evident

Looking at the 9M 2018 figures, the company’s revenue was up 39.4% to N94.8 billion following the y/y improvement witnessed in Q3 2018. However, gross profit margin seemed to be weighed down by cost pressure, particularly in the fuel segment. As a result, the company’s gross profit margin fell by 194bps y/y to 8.9%.  

Nonetheless, a combination of 94.5% jump in other income and 219bps y/y decline in Opex/sales ratio offset the impact of the fall in gross profit margin and a 14.3% y/y increase in net finance cost. Consequently, the company recorded a 109bps y/y rise in PBT margin to 0.4% and a Profit Before Tax of N376million in 9M 2018 from a loss Before Tax of N475millon in 9M 2017.


Going forward, we are still concerned about the company’s ability to improve margin and earnings after the Board’s decision earlier in the year to divest from its upstream, power generation and downstream business (Ghana).  

We believe the company’s strategy to focus on its downstream marketing business may prove difficult, given the inherent challenges faced by companies in the subsector, as regards importation of petroleum products. Furthermore, with oil prices trading above US$70 per barrel, this raises the risk of product shortage.  

Nonetheless, we believe the company’s plan to scale up its fuel business in anticipation of a probable deregulation of the sector after the completion of Dangote refinery projects presents an upside risk for the company. Also, proceeds from the sale of existing businesses should provide adequate funding for the company without necessarily exacerbating its debt position.   

While the commencement of operation of the Dangote refinery in 2020 may support downstream business, we opine that passage of the Petroleum Industrial Bills may provide a lasting solution to the challenges of upstream, midstream and downstream businesses in the Oil & Gas sector within the medium to long term.  

Although, Forte Oil is constrained by its inability to import PMS or control prices in the near term, we expect the company to see support from the NNPC’s drive to increase the availability of petroleum products despite the administration’s unwillingness to alter the current PMS pricing template.

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