One Year Price Performance

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1 In this report we present our views on Forte Oil Plc following the company s FY2014 results. We are inclined to place a SELL rating on the counter with a TP of N53.32 which represents a 74% downside to current price of N207. Nonetheless our sell recommendation which largely draws from potential downside as our valuation model suggest, the company do possess bright prospect as it diversifies into the energy sector with its recent acquisition of Geregu Power Plant. Kindly find below our FY 15 outlook of the company and an analysis of its FY 14 and Q1 15 performance. Revenue Growth Accentuated by Fuel Segment Forte Oil recorded revenue of N170 billion in 2014, showing an increase of 32.8 per cent above the N126 billion posted in Disaggregating the revenue growth reveals that the fuel segment contributes 88.37% of the revenue figure while other segments combined accounted for the remaining 11.67%

2 Huge finance Cost tempered Bottom line Forte oil profit after tax plunged by 11.95% from N5.04billioon in 2014 to N4.45 as a fallout of the increasing interest obligation from the company s facility. Interest obligation rose by a whopping % from 1.87billion in 2013 to 4.207billion in Good days lie patiently ahead Even with the potential downside, the prospect of brighter future is discernable from its diversification move as Forte Oil seeks to become an One Year Price Performance integrated energy service provider through its recent acquisition of Geregu Power Plant making it one of the prominent players in the recently privatized Nigeria power sector. We see this move as presenting a potential upside and a veritable revenue source for the company in times to come 12% 10% 8% Gross margin 11% EBITDA Margin 10% Net Margin 11% 6% 4% 2% 3% 1% 2% 4% 5% 3% 0%

3 Forte Oil Plc (FO) is a Nigerian Stock Exchange (NSE)-listed petroleum products marketing company, primarily focused on the sale and distribution of petroleum products. It is a foremost indigenous energy group headquartered in Lagos, with strong presence in thirty-six states of Nigeria as well as extended operations in Ghana. It operates majorly in the downstream sector of the Nigeria s Oil and Gas industry, but has diversified its businesses into other sectors of the energy value chain. The downstream division specializes in the distribution of a wide range of petroleum products; Premium Motor Spirit (PMS), diesel, aviation fuel, kerosene, as well as a range of lubricants for various automobiles and machines; distributed mostly to the automobile, industrial, aviation 16.0 P/E P/BV 6 and marine markets. Forte Oil also has a subsidiary, which specializes in the supply of Well Production Chemicals and Drilling/Completion Fluids to the Upstream Sector of the Oil and Gas Industry. It continues to pursue aggressive diversification into related high margin businesses, a strategy that has been buoyed by the recent acquisition of the 414 megawatts (MW) Geregu Power Generation Plant located in Kogi State of Nigeria in a government-led privatization of power assets

4 Review of Oil and Gas Industry The Nigerian Oil industry came on stream in 1956, when oil was first discovered in commercial quantities in Oloibiri, Rivers State by Shell D Acry, the forerunner of Shell Petroleum Development Corporation of Nigeria (SPDC) whichh then had the sole concession right to explore and produce crude oil. Shortly after 1960, the sole right given to Shell was reviewed, thus allowing other multinational players like Mobil, Gulf (now Chevron), Agip, Safrap (now Elf) and Texaco to obtain exploration licenses in the onshore and offshore areas adjoining the Niger Delta. The 1970 s witnessed a partial nationalization of the oil industry, as the Federal Government raised its equity participation in most of the companies from an average of 35% in 1971, to 55% in 1974 and 60%in This was in line with OPEC Resolution XVI: Article 90 of June1968, which enjoined all member countries to acquire majority participation in the operation of the oil companies; and the Nigerian Enterprises Promotion Act 1972, which fixed equity participation at 60%in the oil marketing companies and 40% in the oil service companies. The discovery of oil in Nigeria also significantly changed the Nigerian economic landscape, as it upturned existing economic structures and made the oil sector the primary focus of economic activity. Prior to the oil boom of the 70 s, the agricultural sector was the mainstay of the economy accounting for 65% of the Gross Domestic Product (GDP) and70% of total export earnings, thus providing the nation with a good portion of its foreign exchange requirements. The oil boom era ( ) brought about a radical reversal of these economic indices, as the contribution of the oil sector to economic performance took the front burner. The share of the agricultural sector declined to about 26%in 1990, while that of the oil sector, increased to about 32% within the same period.

5 The discovery of oil in Nigeria also significantly changed the Nigerian economic landscape, as it upturned existing economic structures and made the oil sector the primary focus of economic activity. Prior to the oil boom of the 70 s, the agricultural sector was the mainstay of the economy accounting for 65% of the Gross Domestic Product (GDP) and70% of total export earnings, thus providing the nation with a good portion of its foreign exchange requirements. The oil boom era ( ) brought about a radical reversal of these economic indices, as the contribution of the oil sector to economic performance took the front burner. The share of the agricultural sector declined to about 26%in 1990, while that of the oil sector, increased to about 32% within the same period. Also, the revenue from the sector constituted about 90% of the share of the agricultural sector declined to about 26%in 1990, while that of the oil sector, increased to about 32% within the same period. Also, the revenue from the sector constituted about 90%of foreign exchange earnings and 85% of Nigeria s total exports. More recently, even with increasing contributions of the non-oil sectors led by the telecommunications and financial services sector, the oil sector still accounts for about 27% of Nigeria s Gross Domestic Product, 95% of export earnings and 83% of Government revenue respectively. The sector was largely dominated by multinational corporations until the early 1990s when Nigerian companies began to make a foray into the industry. In terms of structure, the industry is broadly divided into:

6 Valuation and Recommendation Based on our DCF analysis of the financial result of Forte, we are inclined to place a sell recommendation on the oil titan based on the obtained intrinsic value of N53.00 per share, whichh indicates that the stock is currently trading at a discount of circa 74%. The recent spike in the stock price arises mainly out of market momentum not based on fundamental. We foresee a price correction on this stock in the days to come.below table displays some of the valuation assumptions employed in our DCF analysis.

7 Financial Highlights

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9 Analyst Certification, Important Disclosure and Disclaimer Analyst Certification The research analysts who prepared this report certify as follows: 1. That all of the views expressed in this report articulate the research analyst(s) independent views/opinions regarding the companies, securities, industries or markets discussed in this report. 2. That the research analyst(s) compensation or remuneration is in no way connected (either directly or indirectly) to the specificc recommendations, estimates or opinions expressed in this report. Investment Rating Criteria and Disclosure Arthur Steven Asset Management adopts a 3-tier recommendation system for assets under our coverage: Buy, Hold and Sell. Thesee generic ratings are defined below; Buy: Based on our valuation and subjective view (if any), the total return upside on the stock s current price is greater than our estimated cost of equity. Hold: Based on our valuation and subjective view (if any), the total return upside on the stock s current price is less than the cost of equity, however, the expected total return on the stock is greater than or equal to the Standing Deposit Facility rate of the Central Bank of Nigeria (which is currently MPR 200bps; i.e 10%). We consider this as the minimum return that may deserve our holding of a risk asset, like equity. Sell: Based on our valuation and subjective view (if any), the total return upside on the stock s current price is less than the Standing Deposit Facility rate of the Central Bank of Nigeria (which is currently MPR 200bps; i.e. 10%). We consider this as the minimum return that may deserve our holding of a risk asset, like equity, especially as we consider the average 4.5% total transaction cost for an average retail investor.

10 Disclaimer Arthur Steven Asset Management (ASAM) notes are prepared with due care and diligence based on publicly available informationn as well as analysts knowledge and opinion on the markets and companies covered; albeit ASAM neither guarantees its accuracy nor completeness as the sole investment guidance for the readership. Therefore, neither ASAM nor any of its associate or subsidiary companies and employees thereof can be held responsible for any loss suffered from the reliance on this report as it is not an offer to buy or sell securities herein discussed. Arthur Stevens Asset Management Ltd. (MEMBER OF THE NIGERIAN STOCK EXCHANGE) Succeeding Together Address: 86 Raymond Njoku Street, SW Ikoyi, Lagos, Nigeria. Telephone:

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