Economy
GCR Affirms Forte Oil Issuer, Bond Ratings At A-(NG)
By Modupe Gbadeyanka
The national scale issuer ratings assigned to Forte Oil Plc of A-(NG) and A1-(NG) in the long term and short term respectively have been affirmed by Global Credit Ratings (GCR) with the outlook accorded as Stable.
Concurrently, the Series 1 Fixed Bond rating has been affirmed at A-(NG) and placed on Stable Outlook. The ratings expire in June 2018.
A statement issued by GCR explained that the ratings were accorded to Forte Oil Plc after taking cognisance of the firm’s top-tier position in the Nigerian downstream petroleum industry, underpinned by a visible brand, significant assets across the value chain, strong relationships with suppliers, experienced management team, as well as an extensive distribution and retail network.
The downstream petroleum industry is heavily reliant on imports, due to low levels of domestic refining. As a result, challenges were heightened by hard currency shortages (which resulted in product scarcity), adverse exchange rate movements and delayed subsidy payments in 2016.
In addition, the harsh economic environment and reduced consumer spending power led to a temporary decline in demand for petrol (following a 67% increase in the pump price in May 2016).
In a bid to reduce exposure to foreign exchange fluctuations, Forte Oil significantly scaled back its refined petroleum product import volumes. As such, FY16 and 1Q FY17 revenue and earnings were significantly below initial forecasts.
Forte Oil’s revenue increased by 19% to N148.6bn in FY16, underpinned by a general price increase across business segments and higher traded lubricant sales volumes. However, the partial cost pass through saw the gross margin decline to 13.9% in FY16, before rebounding to 17.6% in 1Q FY17. Effective cost management and focus on high margin, non-regulated products, saw operating margin increased from 5% in FY15 to 6.3% in FY16 edging up to 9.5% in the 3-month period to March 2017.
The net finance charge spiked to N4.2bn in FY16 (FY15: N1.6bn), due to the impact of Naira devaluation on import finance facilities and higher lending rates. Accordingly, net interest cover reduced to 2.2x in FY16 (FY15: 3.6x), and further to 2x in 1Q FY17.
The N9bn Series 1 Bond Issue and funding raised for the Geregu Power plant overhaul pushed debt up to N49.4bn at FY16. Coupled with a reduction in distributable reserves (following a dividend payment), this drove net gearing up to 75% at FY16 and 80% at 1Q FY17.
Positively, net debt to EBITDA improved to a respective 263% and 209% at FY16 and 1Q FY17, albeit behind target.
Forte Oil plans to raise additional capital of N20bn equity during 3Q 2017. Following the equity raise, management anticipates net gearing to reduce below 35% at FYE17 and FYE18 respectively, while net debt to EBITDA is projected to register around 100% for both years.
Despite the downstream petroleum industry challenges, prospects are enhanced by a strong baseline of demand, on the back of the country’s large urban population and heavy vehicular traffic.
In addition, the completion of Dangote Group’s 650,000bbl/d refinery (set for 2019), is expected to materially reduce the dependence on imports, with the Ministry of Petroleum projecting the cessation of fuel importation once the plant is at full capacity.
Forte Oil plans to expand its retail network and diversify its non-fuel revenue streams with strong local and international brands. In this regard, the power generation business had increased capacity utilisation to 100% by 1H FY17 (1H FY16: 35%) and should contribute materially to earnings in the medium term.
The Group also anticipates a rebound in the upstream oil and gas services business on the back of broader economic recovery in the medium term, and thus plans to expand service offerings.
Sustainable margin enhancement, on the back of the materialisation of current business plans could result in positive rating action if it translates to stronger credit protection metrics in the medium term.
Conversely, adverse regulatory/policy changes, or other external factors could adversely affect earnings and result in liquidity strain and/or increased gearing metrics, placing downward pressure on the ratings. In addition, sustained increase in debt levels and gearing metrics would lead to negative rating action
As the Series 1 Fixed Rate Bond is a senior unsecured obligation of the Issuer, the Bonds will bear the same rating as the Issuer, and any change in the rating assigned to the Issuer will directly affect the Bond rating.
By Adedapo Adesanya
Oil prices fell by over 1 per cent on Thursday as markets weighed macroeconomic concerns from the United States as well as other countries, with Brent futures losing $1.07 or 1.5 per cent to trade at $69.88 a barrel and the US West Texas Intermediate (WTI) crude futures declining by $1.13 or 1.7 per cent to $66.55 a barrel.
The market was depressed from risk that tariff wars between the US and other countries could hurt global demand.
On Thursday, US President Donald Trump threatened to slap a 200 per cent tariff on wine, cognac and other alcohol imports from Europe, in addition to previous tariffs.
According to market analysts, this has opened a new front in a global trade war and has sent jitters to investors who are worried about stiffer trade barriers around the world’s largest consumer market.
This latest move is in response to the European Union’s plan to impose tariffs on American whiskey and other products next month, which itself is a reaction to Mr Trump’s 25 per cent tariffs on steel and aluminum imports that took effect on Wednesday.
The American president has threatened to impose an array of trade penalties since returning to the White House in January, though he has postponed action on many of them.
Also, uncertainty stemming from a US proposal for a Russia-Ukraine ceasefire also affected the market after Russian President Vladimir Putin said it agreed to stop fighting but any ceasefire should lead to a lasting peace and address root causes of the conflict.
The possibility of this could boost the availability of Russian oil.
Also on the supply front, the International Energy Agency reported that global oil supply could exceed demand by around 600,000 barrels per day this year, with global demand now expected to rise by just 1.03 million barrels per day, off last month’s forecast by 70,000 barrels per day.
The report cited deteriorating macroeconomic conditions, including escalating trade tensions.
Meanwhile, the Organisation of the Petroleum Exporting Countries said in its monthly report that the wider OPEC+ group which includes OPEC plus Russia and other allies, in February raised output by 363,000 barrels per day to 41.01 million barrels per day, led by Kazakhstan.
This comes as OPEC+ plans to phases out its most recent layer of output cuts beginning in April.
By Dipo Olowookere
The Nigerian Exchange (NGX) Limited rebounded by 0.12 per cent on Thursday on the back of a renewed bargain-hunting by investors.
The bourse closed higher during the session despite a 0.50 per cent loss suffered by the banking space due to profit-taking.
This was offset by the gains recorded by the others, especially the consumer goods index, which appreciated by 1.40 per cent at the close of business.
Further, the insurance counter improved by 0.62 per cent, and the energy sector gained 0.05 per cent, while the industrial goods and commodity indices closed flat.
When the closing gong was struck by 2:30 pm, the All-Share Index (ASI) went up by 130.56 points to 106,220.94 points from 106,090.38 points and the market capitalisation increased by N82 billion to N66.518 trillion from the N66.436 trillion reported a day earlier.
UPDC was the best-performing equity after chalking up 9.92 per cent to settle at N2.77, International Breweries gained 9.62 per cent to sell for N5.70, Royal Exchange expanded by 9.59 per cent to 80 Kobo, Multiverse rose by 8.81 per cent to N8.65, and NGX Group appreciated by 6.14 per cent to N32.85.
Conversely, University Press lost 10.00 per cent to finish at N4.32, Academy Press shed 9.66 per cent to trade at N2.62, Red Star Express weakened by 9.32 per cent to N5.35, Neimeth slumped by 8.33 per cent to N2.75, and C&I Leasing moderated by 4.75 per cent to N3.81.
Business Post reports that Customs Street ended with 36 price gainers and 20 price losers, representing a positive market breadth index and strong investor sentiment.
A total of 341.7 million shares valued at N16.7 billion exchanged hands in 11,233 deals yesterday versus the 1.5 billion shares worth N10.3 billion transacted a day earlier in 11,748 deals, showing a 64.14 per cent rise in the trading value, a 77.20 per cent decline in the trading volume, and a 4.38 per cent fall in the number of deals.
Tantalizers was the busiest with a turnover of 29.6 million stocks valued at N98.0 million, Access Holdings transacted 29.2 million equities for N693.3 million, Zenith Bank exchanged 28.7 million shares worth N1.4 billion, GTCO traded 26.7 million equities valued at N1.6 billion, and Universal Insurance sold 21.0 million shares worth N12.2 million.
By Adedapo Adesanya
On Thursday, the House of Representatives rejected changes to consumption and company taxes that President Bola Tinubu had proposed in the controversial tax bills as it adopted the Tax Reform Bill as a working document.
President Tinubu was seeking to double the value-added tax (VAT) rate to 15 per cent over six years to help fund the national budget and change how the revenue is distributed among the 36 states of the federation.
But the lower chamber of the National Assembly rejected the proposal, dealing a blow to his efforts to bolster government revenue and reduce borrowings.
The Speaker of the House of Reps, Mr Abbas Tajudeen, said after deliberations on clauses of the bill, it was adopted as a working document.
Mr Tajudeen, who commended the Committee on Finance for a work well done, said the report was a reflection of the mind of Nigerians.
“All the 36 states, including the Federal Capital Territory have their representatives in the sub-committee.
“This is the first time such a report is getting hundred per cent approval by almost all members,” he said.
On his part, the Chairman of the finance committee, Mr James Faleke, said that contentious areas were well taken care of, adding that the committee recommended that VAT should be based on consumption but explained that it still remains 7.5 per cent as it had been.
Mr Falake said the committee recommended a repeal of the Federal Inland Revenue Service (FIRS) to establish the Nigeria Revenue Service (NRS), but kicked against a proposal to lower the company tax rate to 25 per cent by next year, from 30 per cent currently.
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