FORTE OIL PLC EQUITY ‖ NIGERIA ‖ OIL AND GAS

Coverage Analyst: Korede Ologun [email protected] Lead Analyst: Chuks Anyanwu

FORTE OIL PLC: a growing energy powerhouse

[email protected]

10 November 2015

INVESTMENT HIGHLIGHT

FORTE OIL PLC Bloomberg Ticker: FO: NL NSE Symbol: FO Listed on the Nigerian Stock Exchange

Recommendation: SELL

Key Statistics at a glance Fair Value

N278

Current Price

N282

Outlook

Neutral

Industry View

Positive

Market Cap

$1.90Bn

Exchange Rate [$]

N200

Price-Earnings [P E] 2014 Trailing

55.85X

2015F

59.02X

2016F

63.11X

ROE

10.34%

ROA

3.57%

Outstanding Shares

655.31Mn

YTD

27.75%

9 Months 2015: Revenue down by 25.26%; Profit After Tax up by 6.69% Forte Oil (or the “Company” or “FO”) Plc, an indigenous marketing petroleum Company released its third quarter earnings for the period ended September 30, 2015 on the 16th of October 2015. The result showed a 25.26% decline in sales revenue to ₦91.61 billion ($458.05mn) from ₦122.58 billion ($612.90mn) Year-on-Year (YoY) while profit after tax (PAT) grew by 6.69% to ₦4.28 billion ($21.40mn) from ₦4.01 billion ($20.05mn) YoY. Gross profit and operating profit declined by 2.37% and 12.10% YoY respectively while net finance cost reduced by 74.44% YoY. FO recorded an improved third quarter performance compared to the second quarter as revenue and profit after tax grew by 8% and 0.36% respectively quarter on quarter (QoQ). Most recently, FO sold 17% ($200mn) equity stake to Mercuria Energy Holdings SA, the world’s third largest independent energy trader and asset operator, as part of its commitment towards expansion. Forte Oil Plc is a well-placed player in the oil and gas downstream business, upstream services, power generation and upstream exploration although more than 89% of its revenue still comes from fuel sales. We have adjusted for increased contribution of FO’s power business and our analysis clearly shows the growth potentials inherent in FO as the Company continues to make investment efforts to becoming Nigeria’s premier integrated energy solution provider. With aggressive drive to compete in upstream sector and power business, we have made a two year forecast which reflects moderate growth in 2015 and an improved growth in 2016.

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Equity Research Nigeria

VALUATION ANALYSIS Based on our analysis, Forte Oil Plc is currently trading at a premium to our estimated fair value of N278 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 12.50% 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 SELL rating on the stock of Forte Oil Plc because of the Company’s consistent drive for expansion and its capacity to retain value even in an uncertain market. FORECASTS Our FY 2015 revenue forecast for Forte Oil has been reviewed downward by 46.55% to N124.49 billion ($622.49mn) representing a 27.05% decline relative to FY 2014, while our profit after tax estimate for FY 2015 has been reviewed upward by 6.47% to N5.18 billion ($25.90mn); a 16.27 % increase from FY 2014. This yields an improved EPS of N4.74 and a forward P/E of 59.02X (industry average P/E based on our research of peer companies is about 16.17X). As mentioned in our full year report for FO, we expressed our optimism in the ability and willingness of Forte Oil to continue to seek ways to expand the 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. FO changed the name of its upstream services subsidiary to Forte Upstream Services as part of its major restructuring exercise to compete in the upstream sector with a priority to focus on higher margin businesses. This will also position the renewed upstream entity to take full advantage of the Nigerian Local Content and participate in the proposed Federal Government of Nigeria sale of marginal oil fields. FO has managed to maintain an improved PAT despite reduced sales. We are of the opinion that this trend will be overturned by 2016 when the Nigerian government has drifted towards comprehensive and inclusive economic growth. 2 GTI Research

Equity Research Nigeria

INVESTMENT CONCLUSION/OUTLOOK FOR FORTE OIL PLC The shares of Forte Oil Plc currently trade at 1.44 % premium to our fair value estimate of N278. FO’s business expansion drive received fresh capital commitment via equity stake sale to the tune of $200mn (17%) to Mercuria Energy Holdings SA, the world’s third largest independent energy trader and asset operator. The Company continues to impress with new investments as it strives to become Nigeria’s premier integrated energy solution provider. In 2014, FO acquired one hundred (100) brand new product delivery trucks in order to sustain operational efficiency and attain exceptional product throughput. This improved 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. 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. 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 10.85% and 10.92% at the end of 2015 and 2016 respectively. We expect EPS to grow by 16.17% due to a projected 15.08% growth in profit after tax at 2015 year end. We perceive that more FDIs will come in to help expand the business and as Nigeria’s refineries come on stream, the business environment will be a lot better for oil marketers. We have a SELL recommendation on the shares of Forte Oil Plc for investors who have a one to two year horizon.

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

124,498,998

331,669,781

Profit Before Tax

1,149,805

6,524,550

6,006,298

6,970,296

6,659,837

Profit After Tax

1,007,507

5,004,397

5,181,738

5,314,355

539,368

539,368

4,456,617 546,095

655,314

556,398

93.40

463.91

408.04

395.36

477.57

4.00

2.50

2.50

4.00

Number of Shares Earnings Per Share** Dividend Per Share** **in kobo value

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Equity Research Nigeria

FORTE OIL PLC BRAND PORTFOLIO AT A GLANCE

NIGERIAN BREWERIES

REVENUE GROSS PROFIT GROSS PROFIT MARGIN PROFIT B/F TAX PBT MARGIN TAX PROFIT AFTER TAX OWNER'S EQUITY CASH DIVIDEND RELEASE DATE AGM DATE CLOSURE DATE PAYMENT DATE

2011 N '000 230,123,215 109,762,016 48% 56,372,692 24% 18,347,122 38,025,570 78,050,571 125k 22/02/12 16/05/12 14/03/12 17/05/12

2012 N'000 252,674,213 125,452,144 50% 55,624,366 22% 17,581,652 38,042,714 93,447,892 300K 22/02/13 15/05/13 14/03/13 16/05/13

2013 N'000 268,613,518 136,477,042 51% 62,240,317 23% 19,159,968 43,080,349 112,359,185 450K 13/02/14 14/05/14 05/03/14 15/05/14

2014F N'000 266,129,091 138,387,127 52% 59,016,267 22% 17,234,000 41,782,267 128,089,471 450K

2015F N'000 280,766,191 151,613,743 54% 67,383,886 24% 21,562,843 45,821,042 151,145,576 460K

Source: GTI Research

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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.

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