Forte Oil: Profit declines on second half slowdown

Forte Oil closed the 2014 financial year with a net profit of N4.45 billion of which N3.13 billion was earned in the first half of the year. The earnings growth rate in the first half would have taken the company’s profit record to a new peak. With the loss of momentum in the second half however, the company lost profit margin and its recovery trend could not be sustained into a third year.

The decline in profit is in spite of a healthy growth in sales revenue, which sustained a strong recovery in the preceding year. At N170.13 billion, sales revenue is higher than any time in the past five years. Profit margin was eroded by a high rise in interest expenses, which prevented substantial revenues from flowing down to the bottom line. Another setback was a sharp drop in other income, which contributed significantly to the operating profit in the preceding year.

The petroleum marketing company began to experience a turnaround in 2012 when a downslide in earnings performance bottomed out and a strong return to profit followed in 2013. Profit recovery trend could not be sustained into a third year.

Akin Akinfemiwa, the company’s managing director/chief executive officer, seems to have overcome a lot of corporate turnaround challenges. Except the high rise in finance expenses, which reflects the prevalent high cost of funds in the economy, he succeeded in keeping every other major cost line in check. He achieved cost reductions in respect of distribution and administrative expenses, major accomplishments relative to the operating conditions of the industry.

A major positive change that has happened in the company’s operations is the sustained recovery in sales revenue for the second year after four years of sustained drop. The company achieved the first recovery in sales revenue in 2013 after a sustained drop brought turnover to the lowest level in many years in 2012. Sales revenue grew by 32.9% to N170.13 billion in 2014, up on the growth of 40.7% in 2013.  Until 2013, sales revenue faced a sustained decline since 2009. This is an indication that the company is regaining lost market share.

The company reported a decline of about 11% in after tax profit to N4.45 billion in 2014, which follows a 432% advance in 2013. A strong return to profit in 2013 happened after a virtual break-even in 2012. The company had posted huge losses in the preceding three years to 2011. Its peak profit remains the N5.10 billion it earned in 2008 form a turnover of N162.6 billion. It has just beaten its 2008 revenue after six years.

Profit margin declined in the second half of the year and closed well below the preceding year’s mark. Net profit margin came to 2.6% at the end of 2014, down from 3.9% at the end of 2013. By industry standard, Forte Oil remains one of the highest on profit margin within its market segment – second only to Mobil Oil.

The company, no doubt, benefited from the strong growth in sales revenue and a firm control on costs during the year. Cost of sales grew at a slightly lower pace of 31% than turnover, which improved gross profit margin. At N151.66 billion, cost of sales represented 89.1% of turnover at the end of the 2014 financial year, down from 90.4% at the end of the preceding year. Gross profit margin therefore improved from 9.6% to about 11% over the review period. This permitted a rise of 50.6% in gross profit to N18.45 billion.

Another major favourable cost behavior came from distribution expenses, which declined by 15.5% to N2.48 billion against the 32.9% growth in turnover. Administrative expenses also went down slightly by 2.1% to N9.24 billion. Net interest cost was the only major expense line that deviated from the generally favourable cost behavior in 2014. It multiplied more than eight times to stand at N2.13 billion at the end of the year.

Major changes in the balance sheet include increases of over 236% in bank overdraft to N16.5 billion and close to 147% rise in short-term bank borrowings to N12.29 billion. Trade and other receivables grew by 70.2% to N53.6 billion, cash and bank balances expanded by 136.5% to N16.06 billion while trade and other payables rose by 45.1% to N52.51 billion over the preceding year’s figures.

The company earned N2.20 per share at the end of 2014 compared to N4.32 in the preceding year. It has declared a cash dividend of N2.50 per share plus a bonus of 1 for 4 against a cash dividend of N4.0 per share for its 2013 operations.