Earnings Update | FO| Reaping the Benefits of Diversification

Reaping the Benefits of Diversification Forte Oil PLC (“FO”) released its 9M2017 financial scorecard which showed that the company recorded a year-on-year decline of 19.98% in revenue. Gross profit and Profit-After-Tax, however, advanced by 9.11% and 81.42% respectively. The company’s efforts towards concerted cost management was a major driver of the increase in gross profit, as the cost-to-sales ratio declined by 4.65% to 82.55% (vs. 87.20% in 2016). Profit-Before-Tax, however, declined by 0.84% (NGN5.59bn in 2017 vs. NGN5.63bn in 2016) as finance cost increased significantly by 60.45% YoY (NGN5.36bn in 2017 vs. NGN3.51bn in 2016). The growth in the company’s bottom-line was however driven by an 81.96% reduction in income tax expenses (NGN0.51bn in 2017 vs. NGN2.84bn in 2016). Given that the result was slightly below our expectation, we reviewed our valuation and arrived at a revised Target Price of NGN68.89. Hence, we retain our “BUY” recommendation, as the stock currently trades at a discount of 38.42% to our TP. We however advice short term investors to trade with caution given the ranging characteristics of the ticker.