GTI Research Equity Research Nigeria

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 2015. The Company reported revenue growth of 32.88% to ₦170.12 billion

($850.60mn) from ₦128.02 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 937.13% 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 ₦47.54 billion ($354.54mn) in Q4 2014 from ₦42.97

billion ($214.85mn) in Q3 2014.

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 ₦4.00.

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 146.58% while net finance charges increased by

937.13% 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

2016.

Coverage Analyst: Korede Ologun

o.ologun@gti.com.ng

Lead Analyst: Chuks Anyanwu

c.anyanwu@gti.com.ng

11 March 2015

FORTE OIL PLC Bloomberg Ticker: FO: NL

NSE Symbol: FO

Listed on the Nigerian Stock

Exchange

FORTE OIL PLC

FORTE OIL PLC: emergence of a new energy giant?

Recommendation: HOLD

1

EQUITY ‖ NIGERIA ‖ OIL AND GAS

Key Statistics at a glance

Fair Value N193.05

Current Price N192.86

Outlook Neutral

Industry View Positive

Market Cap $1.24Bn

Exchange Rate [$] N200

Price-Earnings [P E]

2014 Trailing 55.85X

2015F 59.93X

2016F 63.11X

ROE 10.05%

ROA 3.20%

Outstanding Shares 546.09Mn

YTD 147.09%

GTI Research Equity Research Nigeria

VALUATION ANALYSIS

Based on our analysis, Forte Oil Plc is currently trading at about our

estimated fair value of N193.05 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 2015.

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

2014. 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.

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.

Revenue declined until 2012 and increased

steadily as management continued to

restructure the business since December, 2010.

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.

2

GTI Research Equity Research Nigeria

INVESTMENT CONCLUSION/OUTLOOK FOR FORTE OIL PLC

The shares of Forte Oil Plc currently trade at about our fair value estimate

of N193.05.

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.

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 2015. Note that the

Company has proposed a N2.50 final dividend and bonus of 1 for every

5 shares held in the Company.

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.

Earnings Per Share (EPS) and Profit Margin

have sustainably improved from 2011 where it

was a huge negative.

3

GTI Research Equity Research Nigeria

4

NIGERIAN BREWERIES

2011 2012 2013 2014F 2015F

N '000 N'000 N'000 N'000 N'000

REVENUE 230,123,215 252,674,213 268,613,518 266,129,091 280,766,191

GROSS PROFIT 109,762,016 125,452,144 136,477,042 138,387,127 151,613,743

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 93,447,892 112,359,185 128,089,471 151,145,576

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: GTI Research

FORTE OIL PLC BRAND PORTFOLIO AT A GLANCE

FINANCIAL SUMMARY AND FORECAST, 2015 AND 2016

FORTE OIL PLC 2012 2013 2014 2015F 2016F

N'000

Turnover 90,984,215 128,027,744 170,127,978 232,718,061 331,669,781

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 539,368 539,368 546,095 556,398 556,398

Earnings Per Share** 93.40 463.91 408.04 437.33 477.57

Dividend Per Share** 4.00 2.50 3.50 4.00

**in kobo value

GTI Research Equity Research Nigeria

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 email to research@gti.com.ng

5