Forte Oil may lead profit growth in petroleum group

Forte Oil may recover the profit growth momentum it lost last year and register the only strong profit advance in the petroleum marketing sector in 2015.  Last year, the company registered a strong growth in sales revenue but lost profit. This year, the reverse is likely to be the case. Sales revenue is headed for a three-year low but profit may advance to a new peak.

The company finished third quarter operations with accelerated growth in profit from N2.53 billion at the end of the second quarter to N4.28 billion. Caution is still required as to whether the company will maintain the current profit growth rate to full year. The company’s earnings pattern last year showed a drastic slowdown in the final quarter. Of the after tax profit of N4.46 billion in 2014, only about N0.44 billion or less than 10% was earned in the last quarter.

Unlike in the preceding two years, strong revenue growth, which provided the strength for profit recovery, is missing this year.  Third quarter operations ended with sales revenue of N91.62 billion, which is a drop of 25.3% year-on-year. Based on the third quarter growth rate, full year turnover is projected at N123 billion for Forte Oil in 2015 – the lowest in three years. This will represent a drop of nearly 28% from the peak sales revenue of N170.13 billion in 2014.

The rest of the operators in the petroleum marketing sector are facing the same problem of declining sales revenue so far this year. Every one of them recoded drops in sales revenue at the end of the second quarter, which is likely to continue in the third quarter results, which are awaited at press time.

Forte Oil returned to profit in 2012 and a strong growth followed in 2013. The company failed to sustain profit recovery in 2014 but a new strength in profit performance has been seen so far in 2015. The company stepped up profit growth from N2.53 billion in the second quarter to N4.28 billion in the third. It therefore shifted from a profit drop of 19.3% year-on-year in the second quarter to a year-on-year increase of 6.7% in the third quarter. The full year profit outlook for the company has improved with after tax profit already standing at 97% of the full year profit last year.

The company has not maintained a track record in earnings performance in the past but a new trend appears to be taking hold. After tax profit declined by about 11% to N4.45 billion in 2014 after a major advance of 432% in 2013. The company posted huge losses in the preceding three years to 2011 before a virtual break-even was achieved in 2012. Its peak profit record is the N5.10 billion attained in 2008, which looks likely to be beaten at the end of this year.

A big leap in other income is a key factor in the company’s ability to grow profit in a declining revenue situation. Other income rose by 216.3% year-on-year to N2.66 billion at the end of the third quarter. Another favourable development is a drop of over 74% in net finance cost during the same period. This is a reversal of the development last year when net interest cost multiplied more than eight times to N2.13 billion. The high rise in interest expenses was a major factor in the profit drop the company suffered in 2014.

Short-term borrowings continue to drop at 62.6% to N4.6 billion at the end of the third quarter though long-term debts grew by 21.7% to N14.91 billion. Bank overdraft also grew by 18.4% to N19.53 billion over the closing figure in 2014.

Cost of sales moderated further in the third quarter by declining ahead of sales revenue. Cost of sales continues to moderate from 90.4% of sales revenue at the end of 2013 to 89.1% in 2014 and further to 85.8% in September 2015. Gross profit margin has therefore continued to improve over the period.

Distribution and administrative expenses however claimed increased proportions of revenue. Administrative expenses rose by 44.5% against the 25.3% drop in sales revenue but the drop in operating profit reduced from 39% in the second quarter to 12% in the third.

Net profit margin has improved further from 4.1% in the second quarter to 4.7% at the end of the third quarter compared to 2.6% at the end of 2014. Forte Oil remains one of the highest on profit margin within its market segment.

The company earned N2.59 per share at the end of the third quarter, improving from N2.04 in the same period last year. It is expected to earn N3.50 per share at full year. Earnings per share had declined from N4.32 in 2013 to N2.20 in 2014.