By Modupe Gbadeyanka
A new report released by ARM Securities on Tuesday, February 21, 2017, has revealed that higher finance charges and tax rates had a dent on the 2016 financial year results of Forte Oil.
This is in contrast to the “stellar 2016 performances” recorded by “sector peers” of the Femi Otedola-led company.
In the report titled ‘Forte Oil Plc: Highly Inflammable?’ it was disclosed that Forte Oil’s audited 2016 financial results “showed underlying earnings weakness which reflected pressures from financing and the taxman.
“On the former, finance charges jumped following Naira depreciation as Forte Oil booked losses on forex loans related to its Geregu power plant ($10million).”
“Further down, FO reported higher effective tax rate in FY 16 (45.9%) which largely drove earnings lower by about half.
“According to management, the steep jump in tax rate was a fallout of differences between the tax provision in 2015, when FO paid record low effective tax rate of 17.4 percent, and actual tax paid per provision of CITA which was charged to the income statement in Q3 of 2016,” the report said.
Also, the ARM Securities report pointed out that earnings of the firm “halved from 2015 levels and FO did not declare a dividend.”
“In response, the stock was heavily sold off (-29.9% YTD, -81.1% over 52-week),” the report said, noting that “current valuations, combined with our upwardly adjusted earnings forecast, underpin our rating upgrade to a NEUTRAL (from SELL).
ARM Securities explained that, “Specifically, our rating reflects the potential upside in the LPG and lubricants segments, hinged on higher prices and volumes, gross margin recovery in its Power business as well as tax rate normalization.”
“Pertinently, we expect to see weighty YoY upside in Q1 2017. We particularly like FO’s market positioning—closest rival to market leader, Total—in key petroleum products and the high margin lubricants market, which will be supportive for earnings.
“Elsewhere, we forecast a 100bps market share gain from inorganic growth. Nonetheless, our view on input cost pressures and PMS volume contraction—which drove underlying weakness in FY 16 numbers—guides our tempered optimism on earnings for 2017,” it said.
For the full report, visit ARM Securities Limited
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