FORTE OIL PLC. FORTE OIL PLC: emergence of a new energy giant? Recommendation: HOLD FORTE OIL PLC FULL YEAR 2014:

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1 FORTE OIL PLC EQUITY NIGERIA OIL AND GAS Coverage Analyst: Korede Ologun Lead Analyst: Chuks Anyanwu 11 March 2015 FORTE OIL PLC Bloomberg Ticker: FO: NL NSE Symbol: FO Listed on the Nigerian Stock Exchange Recommendation: HOLD Key Statistics at a glance Fair Value N Current Price N Outlook Industry View Market Cap Exchange Rate [$] Price-Earnings [P E] Neutral Positive $1.24Bn N Trailing 55.85X 2015F 59.93X 2016F 63.11X ROE 10.05% ROA 3.20% Outstanding Shares Mn YTD % FORTE OIL PLC: emergence of a new energy giant? INVESTMENT HIGHLIGHT FULL YEAR 2014: Cash and Stock Dividend to Ease 10.95% Decline in Profit After Tax. Forte Oil (or the Company or FO ) Plc, an indigenous petroleum marketing Company released its Audited Financial Statements for the Year ended December 31, 2014 on the 19th of February The Company reported revenue growth of 32.88% to billion ($850.60mn) from billion ($640.10mn) Year-on-Year (YoY) while profit after tax (PAT) declined by 10.95% to 4.45 billion ($22.25mn) from 5.00 billion ($25.00mn) YoY. Gross profit advanced by 50% to N18.46billion ($92.32mn) from N12.26billion ($61.31mn) year-on-year. The stronger revenue growth of 32.88% compared with direct input cost which rose by 31% accounts for the improvement in gross profit. Gross profit margin consequently strengthened to 10.85% from 9.58% year-on-year. The Company s operating profit and net finance cost grew by 29.77% and % YoY respectively. Operating profit margin however declined to 4.78% from 4.90% as a result of the 78% decline in other income. The impact of the huge decline in other income would have been worse but for the strong growth in revenue in the review period. On a quarter on quarter (QoQ) analysis, FO reported its strongest PAT growth in the second quarter as PAT surged by 84% while the third quarter reported the weakest net income performance, declining by 57%. In the last quarter, Q4, FO managed a 50% decline in PAT QoQ although revenue grew by 11% to billion ($354.54mn) in Q from billion ($214.85mn) in Q Forte Oil declared a cash dividend of 2.50 and a bonus of 1 new ordinary share for every 5 shares held in the Company. The dividend proposed declined by 37.50% from the previous year s dividend of Forte Oil Plc is a well placed player in the oil and gas downstream business, oilfield services and power sector although more than 90% of its revenue still comes from fuel sales. Most significantly, loans and borrowings grew by % while net finance charges increased by % as the Company aggressively grew its business in 2014 with more of debt. Our analysis clearly shows the growth potentials inherent in FO once the power business begins to crystallize into earnings to support bottom-line of the Company. We have made a two year forecast which reflects moderate growth in 2015 and a more improved growth in

2 VALUATION ANALYSIS Based on our analysis, Forte Oil Plc is currently trading at about our estimated fair value of N with a 12Month investment horizon. In arriving at our fair value for the stock, we focused on the historical financial performance of the stock and our expectation for FY Revenue declined until 2012 and increased steadily as management continued to restructure the business since December, Our fair value for FO shares was calculated using the Discounted Cash Flow (DCF) Model comprising our expected cash flow estimate and dividend consideration for the Company and GTI Securities customized tweak to adjust for the risk of investing in the Nigerian oil and gas sector. Our Required Rate of Return (RROR) factors in a risk premium of 7% and the yield for the most recently issued 20-Year FGN Bond was applied as the risk free rate of return. We have placed a HOLD rating on the stock of Forte Oil Plc because it is currently trading close to its fair value based on our valuation. FORECASTS Our FY 2015 revenue forecast for Forte Oil is N232,718 billion ($11.63bn) representing a 36.79% growth relative to FY 2014, while our profit after tax estimate for FY 2015 is N4.86 billion ($24.33mn); a 9.20% increase from FY This yields an improved EPS of N4.37 and a forward P/E of 59.93X which shows a well priced-in growth evident by the aggressive expansion of the Company considering that the industry average P/E (based on our research of peer companies) is about 16.17X. Profit After Tax declined significantly in 2011 serving as a balance for the restructuring that commenced in 2010 which led to improvements in earnings going forward. Forte Oil will continue to seek ways to expand business in the downstream where it has dominance in Nigeria and in the long-term consider upstream businesses as more International Oil Companies (IOCs) continue to divest interest in the offshore business in Nigeria. Also, recently acquiring stakes in the power sector (Geregu Power Plant) with a 3% divestment in Amperion Power Distribution Company Limited further corroborates the vision for expansion into lucrative businesses in the country. The Company s cash flow statement from 2013 year end signified strong desire for lucrative investments as cash flow from investing activities increased by over 1000% in 2013 crystallizing into huge earnings at the end of that year. Going forward, we perceive that management will continue to push for meaningful investments that will improve bottom-line amidst economic concerns in the country. 2

3 INVESTMENT CONCLUSION/OUTLOOK FOR FORTE OIL PLC The shares of Forte Oil Plc currently trade at about our fair value estimate of N FO s growing market share as a result of strategic and aggressive retail market expansion, aggressive growth of industrial and commercial customer base and distribution network is palpable with the acquisition of one hundred (100) brand new product delivery trucks in order to sustain operational efficiency and attain exceptional product throughput. Debt-to-Equity ratio steadily decreased in the three years from 2011 to 2013; it increased in 2014 as a result of strategic expansions in the business. The investment in power generation with the acquisition of 414MW Geregu Power Plant further reinforces the drive to be present at every point of the energy value chain. The power plant is expected to contribute about 40% to PBT in the immediate term as a major growth driver hence the investment. FO is actively increasing upstream services with diversification into Oil Exploration and Production by participating in Government Oil field marginal field bid rounds and other divestment opportunities by the IOCs. We expect a growth in ROE to about 10.23% and 10.83% at the end of 2015 and 2016 respectively. We expect EPS to grow by 7.17% due to a projected 9.20% growth in profit after tax at 2015 year end. We perceive that oil prices will moderate towards the end of the year with the possibility of upward trend in the last quarter of Note that the Company has proposed a N2.50 final dividend and bonus of 1 for every 5 shares held in the Company. Earnings Per Share (EPS) and Profit Margin have sustainably improved from 2011 where it was a huge negative. 3

4 FORTE OIL PLC BRAND PORTFOLIO AT A GLANCE NIGERIAN BREWERIES F 2015F N '000 N'000 N'000 N'000 N'000 REVENUE 230,123, ,674, ,613, ,129, ,766,191 GROSS PROFIT 109,762, ,452, ,477, ,387, ,613,743 GROSS PROFIT MARGIN 48% 50% 51% 52% 54% PROFIT B/F TAX 56,372,692 55,624,366 62,240,317 59,016,267 67,383,886 PBT MARGIN 24% 22% 23% 22% 24% TAX 18,347,122 17,581,652 19,159,968 17,234,000 21,562,843 PROFIT AFTER TAX 38,025,570 38,042,714 43,080,349 41,782,267 45,821,042 OWNER'S EQUITY 78,050,571 93,447, ,359, ,089, ,145,576 CASH DIVIDEND 125k 300K 450K 450K 460K RELEASE DATE 22/02/12 22/02/13 13/02/14 AGM DATE 16/05/12 15/05/13 14/05/14 CLOSURE DATE 14/03/12 14/03/13 05/03/14 PAYMENT DATE 17/05/12 16/05/13 15/05/14 Source: FORTE OIL PLC FINANCIAL SUMMARY AND FORECAST, 2015 AND F 2016F N'000 Turnover 90,984, ,027, ,127, ,718, ,669,781 Profit Before Tax 1,149,805 6,524,550 6,006,298 6,324,632 6,659,837 Profit After Tax 1,007,507 5,004,397 4,456,617 4,866,626 5,314,355 Number of Shares 539, , , , ,398 Earnings Per Share** Dividend Per Share** **in kobo value 4

5 DISCLOSURE Conflict of Interest GTI Securities Ltd and its sister companies within the GTI Group may execute transactions in securities of companies mentioned in this document and may also perform or seek to perform investment banking services for those companies mentioned herein. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and report(s). Analyst Certification Where applicable, the views expressed in this report accurately reflect the analysts' views about any and all of the investments or issuers to which the report relates, and no part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations, views or corporate finance transactions expressed in the report. Disclaimer This report by GTI Securities Ltd is for information purposes only. While opinions and estimates therein have been carefully prepared, the company and its employees do not guaranty the complete accuracy of the information contained herewith as information was also gathered from various sources believed to be reliable and accurate at the time of this report. We do not take responsibility therefore for any loss arising from the use of the information. For enquires/research queries, please send an to 5