By Emeka Anaeto, Business Editor

AS the bear run on equities listed on the Nigerian Stock Exchange, NSE, persists it seems that investors are more in the mood of negative bandwagon. Thus negative sentiments have trailed even the impressive financial results.

Femi Otedola

But beyond the seeming irrational sentiments, there seem to be some cause for concern in the silver linings presented in some of the impressive financials, especially, the blue chips. One of such is seen in Forte Oil Plc, FO, which released its first quarter 2018, Q1’18, results mid-last week, showing some stellar numbers in both topline and bottomline. But rather down kudos the stock received knocks, falling 3.0 percent under the pressure of share-dumping. Even the avalanche of investment analysts’ positive notes could not help.

Analysts at Cordros Capital Limited, a Lagos based investment and stockbroking house, had commented on the results stating: “FO’s latest result is impressive in our view, and we expect positive investor reaction to follow suit.”

On their part, analysts at Cardinal Stone Partners, another investment house, stated: “We have reviewed our earnings projections and placed a target price of N47.10 on the counter (FO). This implies an upside potential of 21.5% to the last close price of N38.75. Thus, we recommend a BUY rating on the counter.”But the investors were not impressed and these may be some of the reasons:

Downsides facts

Early this month, FO announced that it would divest from its power and upstream businesses in Nigeria.

The firm also announced that it will sell its Ghana-based downstream business. Investors have seen these announcements in the negative or at least cautious wait-and-see position.

But analysts believe the surprising move to divest from the power business was largely because of the liquidity constraint that has been biting the power sector since the privatisation exercise in 2013.

This situation is clearly reflected adversely in the FO’s financials (both full year 2017 and Q1’18) as receivables skyrocketed from N31.5 billion in 2013 financial year, FY’13, (the year FO acquired the Geregu power plant) to N68.1 billion (+116.0%) in FY’17.

Noteworthy is the fact that as at December 2017, the Nigerian Bulk Electricity Trading Plc (NBET), a fully owned government entity saddled with the responsibility for trading electricity between the generation and distribution companies, was indebted to FO to the tune of N32 billion.

Power generation revenue was down 9.74% quarter-on-quarter, QoQ,  as a resulting of  non-remittance of payments by power distribution companies for electricity sold to them and gas supply constraints.

Though FO appears to be making progress in its battle on cost issues, especially in the OPEX and funding, cost of sales was significantly elevated (+21.35% Year-on-Year), due, largely to a 44.33% Year-on-Year rise in cost of sales from the Power Generation segment (a depreciation charge of N996.155 million for the turbines used for power generation is included in the cost of sales).

Though FO plans to boost its topline through the expansion of its distribution network, industry analysts believe there is no evidence that this will boost their fortune further, especially on margins in its fuel business pending the full deregulation of the downstream sector.

Though an emerging FO would see an exit from the power segment headache as well as the Ghana loss making arm, investors appear to remain in wait for the outcome in medium term after the divestments.

But the divestment from power is seen by analysts as positive in the long run.

On this, analysts at Cardinal Stone had this to say: “The divestment from the power business will release funds (N11.0 billion, given a worst-case scenario) for the expansion of the downstream business and the upgrade of its storage infrastructure.

“The proceeds from the divestment will be used to establish more retail outlets nationwide and place the firm almost at par with other major fuel marketers in the downstream sector. This will consequently elevate FO’s market share in the downstream sector.

“Similarly, the shift from power to fuel distribution will boost earnings per share (EPS) attributable to owners of the company in the long run.”

Nevertheless the power business still presented some positive numbers in the Q1’18. Improvement in revenue was majorly driven by the Power Generation segment which recorded revenue growth of 54.18% YoY, benefitting from improved pricing and increased capacity

Though FO’s after-tax profit grew by 166.1% YoY to N12.2 billion in FY’17, the EPS attributable to owners of the company only edged higher by 45.2% YoY to N2.89 as non-controlling interests claimed a larger portion of the profit from the power business.

Trending good

FO is also seen repositioning its lub business segment. It recorded a 5.7 percent growth YoY to N12.1 billion. Recently the company told the Nigerian Stock Exchange that it has obtained exclusive rights to distribute Havoline Motor Oils, a fully synthetic lubricants tailored to meet the high-performance demands of modern engines.

The target customers for these new lubricants are the high-end customers who own high-grade modern automobiles, and upstream companies who require high quality synthetic lubricants for the regular maintenance of their drilling machineries.

FO is said to have already established an agreement to supply Chevron Nigeria Limited with this synthetic lubricant.  FO has not actively played in this segment until now. As a result, this newly launched product will serve as a boost to the lubricants business which currently offers higher profitability margins than the fuel business.

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