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Nigeria Corporate Analysis | Public Credit Rating
Forte Oil Plc
Nigeria Corporate Analysis June 2017
Financial data:
(USD’m Comparative)‡
31/12/15 31/12/16
N/USD (avg.) 193.1 253.2
N/USD (close) 197.0 305.0
Total assets 616.6 460.7
Total debt 192.8 162.0
Total capital 233.5 141.3
Cash and equiv. 59.4 55.9
Turnover 645.2 586.9
EBITDA 46.1 48.6
NPAT 30.0 11.4
Op. cash flow 57.5 39.7
Market cap * N61.2bn/USD200.3m
‡Central Bank of Nigeria exchange rate
* As at 06 June 2017 (N/USD 305.55)
Rating history:
Initial rating/Last rating (June 2016)
Long term: A-(NG)
Short term: A1-(NG)
Rating outlook: Stable
Initial rating – Bond (December 2016)
Series 1 Fixed Rate Bond: A-(NG)
Rating outlook: Stable
Related methodologies/research:
Criteria for rating Corporate entities, updated
February 2017
Glossary of Terms/Ratio, February 2016
GCR contacts:
Primary Analyst
Adekemi Adebambo
Senior Analyst
Committee Chairperson
Dave King
Analyst location: Lagos, Nigeria
Tel: +234 1 4622545
Website: http://www.globalratings.com.ng
Summary rating rationale
The ratings take cognisance of Forte Oil Plc’s (“Forte”, “FO”, or the “Group”)
top tier position in the Nigerian downstream petroleum industry, significant
assets across the value chain, strong relationships with suppliers, experienced
management team and an extensive distribution and retail network.
Being import dependent (due to very low levels of domestic refining), the
downstream petroleum industry faced myriad challenges during 2016,
including hard currency shortages (which resulted in product scarcity), adverse
exchange rate movements and delayed subsidy payments. 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 significantly reduced importation of refined petroleum
products. As such, revenue and earnings for FY16 and the 3-month period to
March 2017 (“1Q FY17”) were significantly below initial forecasts.
Forte’s revenue increased by 19% to N148.6bn in FY16 (budget: N299bn),
underpinned by a general price increase across business segments and higher
traded lubricants 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 increase from 5% in FY15 to 6.3% in FY16 edging
higher to 9.5% in 1Q FY17. The net finance charge spiked to N4.3bn in FY16
(FY15: N1.7bn), 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: 3.7x), 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 (budget: N32.8bn). Coupled with
a reduction in distributable reserves (following a dividend payment), this drove
net gearing up to 75% at FY16 (budget: 35%) and 80% at 1Q FY17. Positively,
net debt to EBITDA improved to a respective 263% and 209% at FY16 and 1Q
FY17, albeit still behind target. Forte plans to raise additional capital of N20bn
equity during 3Q 2017. Following the equity raise, management anticipates net
gearing to reduce below 35% at FY17 and FY18 respectively, while net debt
to EBITDA is projected to register around 100% for both years.
Forte 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 recovery in the upstream oil and gas services
business, while plans exist to expand service offerings.
Factors that could trigger rating action may include:
Positive change: Sustainable margin enhancement, on the back of the
materialisation of current business plans, translating to stronger credit protection
metrics in the medium term.
Negative change: Sustained increase in debt levels and gearing metrics could
lead to negative rating action. As was noted in 2016, business operations are
susceptible to adverse regulatory changes, foreign exchange policy or other
external factors. This could adversely affect earnings and result in liquidity strain
or increased gearing metrics, placing downward pressure on the ratings.
Security class Rating scale Rating Rating outlook Expiry date Long term National A-(NG)
Stable June 2018 Short term National A1-(NG)
Series 1 Fixed Rate Bond National A-(NG) Stable June 2018
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Company profile and recent developments
Incorporated as British Petroleum Nigeria (“BP”) in 1964,
Forte has evolved into a leading integrated energy
company engaged in petroleum marketing, upstream
oilfield services and power generation. In 1978, BP sold
40% of its shares to Nigerians1 and Forte was converted to
a public company. The Federal Government of Nigeria
(“FGN”) acquired BP’s residual 60% stake through the
Nigerian National Petroleum Corporation (“NNPC”) in
1979, while the entity was renamed African Petroleum Plc
(“AP”). Forte’s ownership profile underwent further
changes between 2000 and 2007. In December 2010, AP
rebranded, changing its name to Forte Oil Plc.
Forte markets Premium Motor Spirit (“PMS” or “petrol”),
diesel, Dual Purpose Kerosene (“DPK”), fuel oils and Jet
A-1 fuel (or aviation fuel), drilling fluids and well
production chemicals, while producing and supplying an
extensive range of lubricants. The Group also provides
aircraft refueling operations under the brand name 'Air
FO'. Its operations are underpinned by a network of 5002
retail outlets across the 36 states in Nigeria and Abuja,
with major petroleum storage installations at Apapa
(Lagos State) and Onne (Rivers State). The Group’s
facilities include:
five aviation depots with a combined capacity of
14.7m litres;
two domestic storage depots for PMS, Automotive
Gas Oil (“AGO” or “diesel”) and House Hold
Kerosene (“HHK”), with combined capacity of 46.4m
litres;
one lubricant blending plant in Apapa, Lagos, with
capacity of 50,000 metric tonnes per annum (“mta”);
13 retail stations in Ghana;
a 435MW Thermal Power Plant; and
a Mud Plant
The Group comprises Forte Oil Plc, as the parent company
with three operating subsidiaries being, Amperion Power
Distribution Company Limited (“Amperion Power”), FO
Upstream Services Limited (“FUS”) and AP Oil & Gas
Ghana Limited (“APOG”). Forte holds 57% shareholding
in Amperion Power while APOG and FUS are wholly-
owned subsidiaries. Combined the three subsidiaries
accounted for 11% of Group revenue in FY16 (FY15:
13%) and a much higher 22% of NPBT (FY15: 19%), with
the Power business being the highest contributor. While
revenue and earnings contribution from APOG and FUS
are presently low, the subsidiaries are strategically
important and part of medium term plans for geographic
and product diversification. A brief overview of the
subsidiaries is discussed below.
- Amperion Power was incorporated in January
2011 to develop Forte’s power generation
businesses. The company holds a 51% stake in
Geregu Power Plc (“GPP”), owners of a power
plant in Ajaokuta, Kogi State. A major overhaul
on the gas turbines (completed in October 2016 at
1 In compliance with the Nigerian Enterprises Promotion Decree of 1977 2 186 owned and 322 franchised as at December 2015
USD93m), saw installed plant capacity enhanced
from 414MW3 to 435MW (which can be stretched
to 450MW). Capacity utilisation at the plant has
increased to 100% in June 2017 compared to 35%
previously. Positively, Amperion Power’s
revenue increased 26% to N12.9bn in FY16. With
the plant overhaul now completed, management
expects significant improvement in earnings over
the medium term.
- FUS was incorporated in August 2003, FUS
(previously AP Oilfield Services Limited) is
engaged in the supply of well production
chemicals and drilling and completion fluids to the
upstream sector of the oil and gas industry in
Nigeria. Its client base includes major
international oil companies (“IOCs”) and
prominent indigenous players. FUS also offers
engineering and laboratory support services.
- APOG commenced operations in July 2008, with
head office in Accra, Ghana. The company
markets and distributes petroleum products and
runs 13 retail stations (10 white products and three
liquefied petroleum gas stations).
Forte secured approval from Securities and Exchange
Commission (“SEC”), to issue bonds into the Nigerian
capital market, in 2017, under a N50bn bond issuance
programme (“the Programme”). Under the Programme,
bonds will be issued in series by way of private placement,
book building, public offering, or any of the other methods
described in the relevant Pricing Supplement. Forte has
raised an initial N9bn in December 2016, under the
Programme. Please see Pages 6 to 7 for a summary of
details.
Forte’s management has revealed plans to raise N20bn
equity during 3Q 2017, through an offer for subscription.
The Board of directors and shareholders have approved the
proposed capital raise and filed an application for
regulatory approval with Securities and Exchange
Commission (“SEC”). Per the draft prospectus, the net
proceeds will be applied towards expansion of retail
outlets, investment in lubricants and specialties and
working capital.
Corporate governance and shareholding structure
Forte’s corporate governance structure complies with the
requirements of Companies and Allied Matter Act, The
Nigeria Stock Exchange and SEC’s code of corporate
governance for publicly quoted companies. There were
changes in the size and composition of FO’s Board of
directors (“Board”) post-June 2016, owing to retirement
and resignation of two Board members, and appointment
of new board members, in the normal course of operations.
To further enhance corporate governance standards above
the required regulatory requirements, FO appointed three
new independent directors. Forte presently has an eight-
member Board, comprising two executive directors and
3 Of which, only 138MW was previously utilised
Nigeria Corporate Analysis | Public Rating Page 4
five non-executive directors (of which four are
independent) and the Chairman, Mr. Femi Otedola.
Table 1: Corporate governance summary
Board Composition
Number of directors 8
Independent non-executives 4
Non-independent non-executives 2 (including the Chairman)
Executives 2 (including the Managing
Director)
Tenure of non-executives Independent: initial term of 3 years, and
eligible for subsequent re-election.
Separation of the chairman Yes
Frequency of meetings Minimum of quarterly.
Board committees Corporate Governance and Remuneration; Risk Management;
Finance and Strategy and Statutory Audit
Internal control and compliance Yes, independent reports to Audit Risk
Management Committee.
External auditor PKF Professional Services.
Oversight functions are carried out through a full Board
and the Board Committees listed in Table 1. In terms of
day to day operations, Forte has five management
committees covering all the important aspects of business.
The Board is made up of very experienced professionals
with several years of experience in various economic
sectors. Some of the directors also hold other directorships
in other companies (including publicly quoted
institutions). The Group’s shares are closely held, with the
Chairman’s combined direct and indirect interest reported
at 77% at 31 March 2017 (FY16: 78%).
Table 2: Shareholding structure
at 31 March, 2017 Number of shares Holding (%)
Zenon Petroleum and Gas Limited 640,476,400 48.87
Thames Investment Incorporated 197,886,041 15.11
Mr Femi Otedola 186,260,357 14.21
Other investors** 285,896,469 21.81
Total 1,310,629,267 100.00
*Source: Forte management
**Made up of over 150,000 individual shareholders, who have less than 5% stake
Financial reporting
Audited financial statements are prepared in accordance
with International Financial Reporting Standards
(“IFRS”), as well as the requirements of Company and
Allied Matters Act 2004 and the Financial Reporting
Council of Nigeria Act 2011. Forte’s external auditor, PKF
Professional Services, issued a clean audit opinion on the
2016 financial statements.
Operating environment
Economic overview
The Nigerian economy remained subdued throughout
2016 owing to shortfall in crude oil production, low and
unstable international oil prices, which has severely
affected the country’s foreign reserve levels and fiscal
planning capacity. Specifically, international crude oil
prices declined from c.USD110/bbl in June 2014 to
USD30/bbl in January 2016, and averaged USD43 in 2016
(on the back of a rebound towards year-end, which saw
prices climb to USD53/bbl in December). The negative
economic trend was exacerbated by the resurgence of
disturbances in the Niger Delta region (which affected
crude oil production outputs) and the impact of reduced
4 Benchmark interest rate 5 MPR has been left unchanged since July 2016
foreign exchange (“forex”) earnings on the economy.
According to the National Bureau of Statistics (“NBS”),
oil production declined from an estimated 2.13mb/day in
2015 to 1.833mb/day in 2016. In addition, gas shortage
and resultant erratic electricity supply affected industrial
output. The significant fall in the value of the Naira against
the US dollar, (largely attributable to the role oil plays in
funding Nigeria’s treasury), further heightened
uncertainty. The country’s real gross domestic product
(“GDP”) contracted by 1.5% in 2016 (compared to 2.8%
and 6.2% growth recorded in 2015 and 2014 respectively),
placing the country in a recession. The economy
contracted further by 0.52% in 1Q 2017 (1Q 2016: 0.67%),
representing the fifth consecutive quarter of contraction
since 2016. Inflation climbed from 9.5% at end-December
2015 to 18.6% at end-December 2016, before easing to
16.3% at end-May 2017.
Despite Central Bank of Nigeria’s (“CBN”) restrictive
policy that denied access to forex (from the official CBN
window) for 41 items and removal the exchange rate peg
to the USD in favour of a flexible exchange rate policy in
June 2016, the Naira remained under pressure, with the
inadequate forex supply from the official CBN window
driving much weaker exchange rates in the parallel market.
The NGN/USD exchange rate rose above N500/USD in
February 2017 (remaining above N450/USD till mid-
March 2017). CBN established the Investors & Exporters
FX window in April 2017, to boost liquidity in the FX
market and to ensure timely execution and settlement for
eligible transactions. The recent intervention has increased
the dollar liquidity in the market with exchange rates
remaining below N400/USD since end-April. During the
last Monetary Policy Committee meeting held in May
2017, CBN has maintained the monetary policy rate4
(“MPR”) at 14%5, while the cash reserve ratio and
liquidity ratio for banks were also maintained at 22.5%
and 30% respectively, in line with efforts to combat
inflation and maintain price stability.
Given the current macroeconomic challenges, prospects
for growth remain mixed over the short to medium term.
Both the International Monetary Fund and World Bank
expect the economy to record a modest rebound in 2017
(of 0.8% and 1.2% respectively). To stabilise the
economy, the FGN has maintained an expansionary policy
for the 2017 fiscal year, with a budget of N7.44trn6 (2016:
N6.08tn, 2015: N4.49tn). The budget is based on an oil
benchmark of USD44.5/bbl and a daily production output
of 2.2mb/d, inter alia. The Ministry of Budget and
National Planning has recently released the Economic
Recovery and Growth Plan (“ERGP”) 2017-2020. Based
on the ERGP, the FGN anticipates that accelerated
infrastructural spend and the diversification of earnings
would drive an increase in economic activities, thereby,
resulting in an overall GDP growth in 2017. The ERGP
centres on achieving macroeconomic stability and
economic diversification, in order to boost non-oil
revenues, with focus on key sectors of agriculture and food
security, energy, transportation and manufacturing. The
6 Signed into law in June 2017.
Nigeria Corporate Analysis | Public Rating Page 5
ERGP will aim to reduce the level of dependence on
imports, while increasing revenue from a diversified
stream of export activities. Overall, the ERGP seeks to
achieve a robust 7% economic growth by end-2020.
Industry overview and competitive position
The Nigerian downstream oil and gas industry is
dominated a few large players, which account for c.60%
of annual petroleum product volumes. The remainder is
split across over 3,000 independent petroleum marketers,
who are members of the Independent Marketers
Association of Nigeria (“IPMAN”). The six major
marketing companies belong to the trade group known as
the Major Oil Marketers Association of Nigeria
(“MOMAN”). In terms of 2016 product volumes and
revenue, the industry was dominated by Total Nigeria Plc
(“Total”), Forte and MRS Oil Plc. Over the past few years,
some International Oil Companies with interests in
Nigeria, have divested their upstream and downstream
assets to indigenous firms, citing challenges in the
operating environment and the need to support local
capacity development. ExxonMobil Oil Corporation
(“ExxonMobil”), USA recently sold its 60% stake in
Mobil Oil Nigeria Plc (“Mobil”) to NIPCO Plc7, with the
deal finalised in April 2017.
Table 3: Competitive position – Major Petroleum Marketing Companies
FY16 (N'm) Forte Total MRS Mobil Conoil
Plc Eterna Plc
Turnover 131,614 290,9523 109,635 94,108 85,024 107,536
EBITDA 7,796 24,153 4,758 8,408ꞌ 5,275 6,974
Op. Income* 6,454 20,881 3,245 5,786 4,031 6,574
Net interest (1,265) 240 (1,002) 260 250.0 (3,427)
NPAT 3,236 14,797 1,466 8,154 2,838 1,523
Equity 11,663 23,496 22,134 21,375 18,402 10,438
Total debt 33,379 9,220 18,527 0.0 8,991 7,054
Cash 16,144 21,843 10,911 8,442 42,295 7,117
Current assets 51,288 106,771 62,006 22,328 64,071 24,637
Total assets 73,248 136,854 81,335 61,619 69,770 31,088
Current liabilities 49,892 113,113 54,070 18,822 50,384 18,135
Ratios (%)
Rev. growth 20.9 39.9 25.9 46.5 2.5 16.0
Gross margin 11.5 16.9 8.0 16.7 16.6 7.8
Op margin 4.9 7.2 3.0 6.1 4.7 6.1
Net int.cover (x) 5.1 n.a 3.2 n.a n.a 1.9
Net debt : equity 147.8 n.a 34.4 n.a n.a n.a
Net debt :EBITDA 221.1 n.a 160.1 n.a n.a n.a
Current ratio 1.0 0.9 1.1 1.2 1.3 1.4
Table 3 is based on Company numbers sourced from audited financial Statements as at
31st December 2016
*Adjustments have been made to reflect core operating income
ꞌExcludes N6bn rental income on investment property
The oil industry GDP contracted by 13.7% in 2016 (2015:
5.5%) and contributed a reduced 8.4% to real GDP (2015:
9.6%), due to reduced production levels and low
international crude oil prices. Nigeria has four refineries
with an estimated production capacity of 445,000 barrels
per day (bbl/d). However, the refineries operate well
below capacity (less than 10%), thus the Nigerian
downstream oil and gas sector has to import most of the
country’s refined petroleum requirements. Nigeria
experienced prolonged fuel scarcity between January 2016
and May 2016 due to inability of petroleum marketers to
source foreign currency at official rate (occasioned by
reduced foreign exchange earnings). As such, marketers
7 NIPCO Plc, formerly called IPMAN Petroleum Marketing Company Limited, was
incorporated by members of the IPMAN in 2001
were not able to import enough fuel to meet demand,
which in turn reduced sales volumes sold. This was further
exacerbated by delayed subsidy payments.
In May 2016, the FGN introduced a price modulation
mechanism designed to more closely reflect cost and
market dynamics. Price guidance of N135-N145/litre was
given, with petroleum marketers having sold largely at the
maximum price since the introduction of the policy. Prior
to the price increase in May 2016, PMS was subsidised at
a pump price of N86.5/l (December 2015: N95/l). The
FGN benchmark was increased to N285/USD (from
N197/USD) in the revised PMS pricing template, whereas
the market exchange rate in force as at the time of the
policy was N340/USD. Due to reduced consumer
spending power (occasioned by high inflation) and
increased unemployment levels, PMS sales volumes
declined in subsequent weeks, as individuals adopted
various cost cutting measures (including car-pooling).
In a bid to avert further market scarcity, CBN launched a
forex intervention programme in conjunction with NNPC
to fund petroleum imports. This notwithstanding, a
rebound in crude oil prices prevented marketers from
importing and selling profitably even at the fixed
maximum pump price of N145/l. Accordingly, the
downstream petroleum sector had to source refined
products mainly from NNPC (as the importer of last
resort). The downstream petroleum sector is characterised
by low profit margins as cost of procurement/sales absorb
as much as 80% of turnover. Despite these challenges,
industry prospects are enhanced by a strong baseline of
demand, on the back of the country’s large urban
population and heavy vehicular traffic. Looking ahead,
substantive economic recovery will have a positive impact
on industry fortunes. 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.
Earnings diversification
Table 4: Earnings
diver. (N’m)
Revenue Gross Profit Gross Margin
FY15 FY16 FY15 FY16 FY15 FY16
Fuels 104,302.2 121,606.9 10,316.8 12,167.0 9.9 10.0
Prod. Chemicals 3,870.8 2,599.4 945.9 1,002.9 24.4 38.6
Lubes and greases 6,176.5 11,455.0 2,170.5 3,133.3 35.1 27.4
Power generation 10,267.8 12,944.0 4,928.2 4,280.7 48.0 33.1
Total 124,617.2 148,605.3 18,361.4 20,583.9 14.7 13.9
Fuels accounted for 82% (FY15: 84%), in line with the
industry dynamics. However, given the relatively tight
PMS margins and given that the product accounts for over
70% of fuel sales, the overall contribution to gross profit
is disproportionately lower (FY16: 59%; FY15: 56%). The
fuel gross margin remained at same level, owing to
adverse exchange rates, which somewhat eroded the gains
from the partial deregulation of PMS in May 2016. The
power business contributed a higher 9% of group revenue
in FY16 (FY15: 8%), while its gross profit contribution
moderated from 27% in FY15 to 21% in FY16, due to
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start-up gas costs during the plant overhaul and (an 89%)
increase in gas costs effective January 2016, without
corresponding increase in energy wholesale tariff until
February 2016. Excluding plant depreciation from cost of
sales, normalised gross margin reduced from 59% in FY15
to 45% in FY16.
Forte grew its lubricants business volumes by 67% to 21.5
million. Thus, the segment’s revenue almost doubled to
N11.5bn in FY16, while revenue and gross margin
contribution also increased. Production chemicals enjoy
strong margins, albeit relatively small within the Group
context. Management’s strategy is to focus on high margin
and deregulated products like lubricants, LPG and also
take advantages of opportunities in the non-fuel revenue
segment, to make up for volume shortfalls in the fuels
business. Earnings are quite granular, with the top twenty
customers accounting for c.1% of Group revenue.
Financial performance
Reflected at the end of this report is a five-year financial
synopsis of Forte, together with the three months
unaudited management accounts for the period ended 31
March 2017. Brief commentary follows.
Table 5: Income
statement (N'm) FY15
FY16 %
Achieved YoY %
∆ Actual Forecast
Revenue 124,617.2 148,605.3 299,060.0 49.7 19.2
Gross Profit 18,361.4 20,583.9 40,564.0 50.7 12.1
EBITDA 8,903.8 12,297.5 26,696.0 46.1 38.1
Depr. and Amort. (2,649.9) (2,988.4) (1,021.0) 292.7 12.8
Op. Profit* 6,253.9 9,309.1 25,675.0 36.3 48.9
Net inc./(expense) (1,675.8) (4,281.9) (2,992.0) 143.1 155.5
Other op. income 2,434.3 17.9 - n.a (99.1)
Forex and reserving 440.9 295.6 - n.a (33.0
NPBT 7,012.4 5,340.7 22,683.0 23.5 (23.8)
Key ratios (%)
Gross margin 14.7 13.9 13.6 - -
EBITDA margin 7.1 8.3 8.9 - -
Op. margin 5.0 6.3 8.6 - -
Net int. cover (x) 3.7 2.2 8.6 - -
*inclusive of rental income, throughput income, freight income and scrap sales
The challenging operating climate saw Forte reduce its
refined petroleum product imports, in order to mitigate
exposure to foreign exchange fluctuations. Accordingly,
business volumes were significantly lower than anticipated,
driving material underperformance against budget. Group
revenue rose by 19% to N148.6bn in FY16, underpinned by
increase in PMS prices during the year, expansion of the retail
outlet footprint, an increase in the lubricant market share and
increased utilisation of the power plant, following completion
of overhaul at GPP. Although gross margin declined slightly
in FY16 due to relatively higher cost of sales in the power
and lubricants business, gross profit rose by 12% to N20.6bn.
This was shored up by increased energy tariffs (in the power
segment) and higher traded lubricant volumes despite the
price increase. Overheads were well contained and remained
below the FY15 level. As such, the operating profit increased
by 49% to N9.3bn in FY16, at a firmer 6.3% operating
margin (FY15: 5%).
The gross interest expense increased 20% to N6.2bn,
largely attributable to the impact of devaluation on Forte’s
import finance facilities, higher lending rates and funding
for the overhaul project at GPP. After accounting for
interest income of N1.9bn, the net finance charge rose
sharply to N4.3bn in FY16 (FY15: N1.7bn), and as a result
net interest coverage reduced to 2.2x, from 3.7x in FY15.
Forte reported other income from the gain on disposal of
investment property, as well as a foreign exchange gain
arising from sale of dollar inflow. Overall, other income
was lower in FY16, as some items such as investment
income from held-to-maturity instruments and sale of
forfeited shares realised in FY15 did not repeat. Overall,
pre-tax earnings dipped by 24% to N5.3bn in FY16.
Forte’s tax charge doubled to N2.4bn in FY16, after
recognising a N1.3bn tax under-provision, arising from the
application of dividend tax law in respect of FY15
dividend pay-out. The Group’s NPAT halved to N2.9bn in
FY16, significantly below initial expectation of N16.2bn.
Cash flows
Cash generated by operations increased 17% to N12.8bn
in FY16, following the marked improvement in EBITDA.
Working capital pressures have historically resulted from
trade and subsidy receivables, as well as significant
inventory movements. Subsidy receivables declined from
N26.5bn at FY14 to N15.1bn at FY16, albeit substantial.
During FY16, Forte moderated the importation of white
product imports (buying mainly from NNPC) and as such,
inventory levels more than halved to N4.7bn (FY15:
N10.1bn). Trade and other payables spiked to N44.4bn in
FY16, from N34.2bn previously, with the increase largely
ascribed to the amount due to NNPC (which increased
from N2.9bn at FY15 to N10.1bn at FY16). Forte has to
settle NNPC invoices in 14 days, while other product
suppliers are usually paid 30 days after delivery of
products. Coupled with the decline in inventories, this
offset the elevation in trade and other receivables. Overall,
Forte reported a second subsequent working capital release
of N3.3bn (FY15: N2.9bn). After accounting for higher
interest and tax payments, operating cash flows fell by
10% to N10bn.
Forte made a cumulative dividend payment of around
N6bn during FY16. This pertained mainly to the dividend
of N3.45 per share declared in respect of FY15 financial
performance. Forte’s Board took a decision to plough
back FY16’s net income into the business, as such, no
dividend was recommended in respect of FY16 results.
Total capex spend was N9.8bn in FY16, and related
mainly to the plant upgrade at GPP, other plant and
equipment (for petrol stations), LPG plants, motor
vehicles and fire trucks. Due to the large dividend pay-out,
0
4
8
12
0
5
10
15
FY12 FY13 FY14 FY15 FY16
%N'bn Figure 1: Operating performance
EBITDA Op. profit NPBT EBITDA margin (RHS)
Nigeria Corporate Analysis | Public Rating Page 7
FY16 capex was funded mainly through debt. Combined
with the Series 1 N9bn Issue, net debt rose by N5.7bn in
FY16 (FY15: N3.2bn).
Funding profile
The Group’s asset base has grown more than three-fold
from N41.8bn at FY12 to N140.5bn at FY16 (budget:
N124.4bn). The most significant increase occurred
between FY12 and FY13, underpinned by the acquisition
of the power plant. This saw fixed assets increase from
N9bn at FY12 to N51.8bn at FY13. PPE has since
averaged 48% of total assets, from around 21% previously.
In line with the nature of the petroleum marketing
business, working capital assets have historically
dominated the asset mix, accounting for around half of
total assets until FY14. Since FY15, following receipt of a
substantial portion of subsidy due from the FGN, trading
assets have represented a stable 37% of total assets. The
remainder of the asset base comprised mainly of cash,
which averaged 10% over the review period.
Underpinned by acquisition of GPP, total equity increased
from just N6.8bn at FY12 to N41.7bn at FY13. It peaked
at N46bn at FY15 (FY14: N43.9bn) on the back of firmer
retained earnings and inflow from minority interest, but
dipped to N43.1bn in FY16, following a decline in
distributable reserves. As at FY16, debt and creditors
made a relatively even contribution to total funding at
35% and 34% respectively, with the remaining 31%
(FY15: 38%) represented by equity.
Table 6: Funding
profile (N’m) FY15 FY16
FY16
forecast 1Q FY17
ST debt 24,026.2 23,324.2 0.0 23,526.8
LT debt 13,951.7 26,099.2 32,813.0 25,873.9
Total debt 37,977.8 49,423.4 32,813.0 49,400.8
Cash (11,700.8) (17,043.9) (12,415.0) (13,558.6)
Net Debt 26,277.0 32,379.5 20,398.0 35,842.2
Equity* 45,994.6 43,104.3 58,296.0 44,701.9
Key ratios (%):
Total debt: equity 82.6 114.7 56.3 110.5
Net debt: equity 57.13 75.1 35.0 80.18
Total debt: EBITDA 426.5 401.9 122.9 287.7
Net debt: EBITDA 295.1 263.3 76.4 208.8
Cash:ST debt (x) 0.5 0.7 n.a 0.6
*Equity is measured on a net tangible basis, in line with rating methodology
Forte maintains credit facilities with four Nigerian banks,
three of which have national presence. As at 31 March
2017, FO had a global loan limit of around N61bn across
four banks, indicating sufficient facilities to meet expected
financing requirements. The GPP capex project, combined
with the N9bn Series 1 Bond, saw gross debt increase (well
ahead of N32.8bn forecast) by N11.4bn to N49.4bn in
FY16. Total debt remained largely unchanged as at
1Q FY17. Prior to the Bond Issue, long term debt pertained
solely to the funding for the acquisition of GPP, that is, an
N11bn bank loan and an N8.5bn Power Intervention loan
granted to GPP by CBN). The long term bank debt is
secured by an all asset debenture, while the N9bn is
unsecured. Short term facilities mainly consist of
overdrafts and trade finance facilities and are generally
secured against a negative pledge, a lien on products
purchased and domiciliation of proceeds.
As interest rates on debt range from 17% to 27% per
annum, it is crucial that facilities are settled as soon as
possible to avoid onerous interest charges and further
decrease the already narrow profit margins. Forte has
refinanced N6bn of expensive short term debt, with bond
proceeds. Accordingly, long term debt accounted for a
higher 53% of Group borrowings, from 37% previously,
with the enhanced debt maturity profile a positive ratings
consideration. Working capital loan utilisation levels vary
month on month depending on stock levels and quantum
of outstanding receivables. Utilisation has historically
averaged N6bn per month. Short term loans are typically
for a one year tenor, with 60 day to 90 day payment cycles
for international trade finance facilities (“IFF”), and are
renewable yearly. Forte indicated that IFFs are usually
paid within 60 days from receipt of products or the bill of
lading date.
Higher debt underpinned an increase in net gearing to 75%
at FY16 (budget: 35%), before reaching 80% at 1Q FY17.
Net debt to EBITDA declined to 263% and 209% at FY16
and 1Q FY17 respectively, albeit materially
underperforming against targets.
Review of the N9bn Series 1 Fixed Rate Bond
In December 2016, the Issuer raised an initial N9bn in
Series 1 Bonds, from the capital market, with a 5-year
tenor (legal maturity date of December 2021). The bond
was issued at a fixed annual interest rate of 17.5% p.a,
payable semi-annually in arrears (in June and December
each year), while the principal will be fully amortised by
eight semi-annual instalments, following the expiration of
a 12-month moratorium period. The Bonds have been
listed on NSE and FMDQ OTC Plc trading boards.
Table 7: N9bn Series 1 Bond Amortisation schedule
Payment Dates % of principal
repaid
Amount paid
(N'm)
Outstanding
balance (N'm)
2-Jun-17 0.0 0.0 9,000.0
2-Dec-17 0.0 0.0 9,000.0
2-Jun-18 9.0 823.5 8,176.5
2-Dec-18 10.0 895.5 7,281.0
2-Jun-19 11.0 973.9 6,307.1
2-Dec-19 12.0 1,059.1 5,247.9
2-Jun-20 13.0 1,151.8 4,096.1
2-Dec-20 14.0 1,252.6 2,843.6
2-Jun-21 15.0 1,362.2 1,481.4
2-Dec-21 16.0 1,481.4 0.0
Net bond proceeds (after deduction of transaction costs)
amounted to N8.6bn. Of this, N6bn has been applied
towards debt refinancing as planned. Per the
supplementary shelf prospectus, Forte will invest N2.6bn
in retail outlet expansion. As at June 2017, only N241.5m
has been utilised, with the remainder invested in short term
fixed deposits pending utilisation. Management has
indicated that Forte is adopting a cautious approach
towards retail outlet expansion, given the tough
macroeconomic conditions, and that it had a 12-month
leeway from SEC to utilise the remainder of the proceeds.
GCR has reviewed the bond performance report from the
joint Trustees (ARM Trustees Limited, FBN Trustees
Limited, Union Trustees, United Capital Trustees and
Vetiva Trustees Limited) and notes that the first coupon
Nigeria Corporate Analysis | Public Rating Page 8
payment (N787.5m) was made on due date of 2 June 2017.
The next coupon payment is due on 2 December, 2017.
The Trustees did not report any breach of negative pledge
or covenants by the Issuer.
Table 8: Utilisation of proceeds - Series 1 Bonds
Purpose Amount (N’m) % of proceeds Completion
period
Refinance commercial bank
loans 6,003.3 66.70 Immediate
Retail outlet expansion 241.5 2.68 12 months
Cost of Issue 176.4 1.96 Immediate
Underwriting fee 247.5 2.75 Immediate
Investment 2,331.3 25.9 n.a
Total 9,000 100.00
Year-to date performance and Outlook
In May 2016, GCR was provided with 5-year forecasts for
the period spanning FY16 to FY20. The budgets
anticipated robust growth in revenue and earnings over the
medium term, underpinned by a substantial increase in
product volumes. In view of recent developments, the
Group has revised its FY17 expectations to capture current
economic realities.
Table 9 : YTD
Earnings diver.
(N’m)
Revenue Gross Profit Gross Margin
1Q FY16 1Q FY17 1Q FY16 1Q FY17 1Q
FY16
1Q
FY17
Fuels 29,930.7 22,765.4 2,973.7 2,622.8 9.9 11.5
Prod. Chemicals 527.7 468.4 123.1 219.2 23.3 46.8
Lubes and greases 2,155.7 3,238.0 511.5 592.9 23.7 18.3
Power generation 2,988.0 6,532.2 1,197.0 2,368.4 40.1 36.3
Total 35,602.1 33,004.0 4,805.2 5,803.3 13.5 17.6
Reduced fuel volumes saw segmental revenue decline by
24% to N22.8bn in 1Q FY17. The Group is already
accruing benefits from the GPP plant overhaul, as revenue
from the business more than doubled to N6.5bn in 1Q
FY17. Revenue contribution from the power generation
business increased considerably from just 8% in 1Q FY16
to 20% in 1Q FY17. (Similarly, its contribution to overall
gross profit also increased to 41%, from 25% in 1Q FY16)
The lubricants business also recorded higher volumes and
revenue. With fuels being the dominant revenue source,
the Group’s turnover declined 7% YoY to N33bn,
representing 13% of FY17 budget. Positively, CBN’s
recent intervention has improved dollar liquidity and led
to an improvement in exchange rates. Furthermore,
management has emphasised that sales volumes will
increase in the third and fourth quarters of the year, due to
increased travels and festivities during the period.
Table 10: Income
statement (N'm) 1Q FY16 1Q FY17 YoY %Δ
FY17
revised
budget
%
achvd.
Revenue 35,602.1 33,004.0 (7.3) 252,984.6 13.0
Gross Profit 4,805.2 5,803.3 20.8 29,858.8 19.4
EBITDA 2,999.6 4,292.3 43.1 17,271.4 24.9
Depreciation (567.3) (1,148.0) 102.4 (1,837.1) 62.5
Op. Profit 2,432.3 3,144.3 29.3 15,434.3 20.4
Net interest (1,144.4) (1,577.1) 37.8 (4,491.1) 35.1
Other . inc/exp. 0.0 1.6 n.a - -
forex and reserving 13.6 481.0 3,441.8 - -
NPBT 1,301.5 2,049.8 57.5 10,943.2 18.7
Key ratios (%)
Gross margin 13.5 17.6 n.a 11.8 n.a
EBITDA margin 8.4 13.0 n.a 6.8 n.a
Op. margin 6.8 9.5 n.a 6.1 n.a
Net int. cover (x) 2.1 2.0 n.a 3.4 n.a
Fuels’ gross margin increased to 11.5% in 1Q F17, while
strong margins were sustained across other business
segments. Forte reported improvement in all profitability
metrics in 1Q FY17, which exceeded 1Q FY16 position
and budgeted margins. Operating profit increased 29%
YoY to N3.1bn, and was 20% of revised FY17 budget.
High commercial lending rates, utilisation of additional
working capital facilities and Series 1 Bond interest, drove
a 38% increase in net finance charge to N1.6bn in 1Q
FY17, which saw a further decline in net interest cover to
2x. Management has indicated that the coverage will
improve for the full year due to anticipated improvement
in earnings. Overall, NPBT improved 58% YoY to N2bn
at 1Q FY17.
In a bid to enhance market share, Forte plans to expand its
retail network and diversify its non-fuel revenue streams
with strong local and international brands. The drive to
grow its deregulated products line, through affiliation with
an international OEM brand for lubricants is, however,
still at nascent stages. 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. In addition, the Group anticipates a
recovery in the upstream oil and gas services business,
while plans exist to expand service offerings.
As at FY16 and 1Q F17, Forte had exceeded initial debt
and gearing forecasts. Sustained increase in debt and
gearing metrics could lead to a negative rating action.
Following the proposed N20bn capital raise, total equity is
forecast to reach N64bn at FY17, before edging higher to
N75.3bn at FY18. Accordingly, management anticipates
net gearing to reduce below 35% at FY17 and FY18
respectively, while net debt to EBITDA is projected to
register around 100% for both years. Materialisation of
current business plans and additional equity could lead to
a moderation of gearing metrics over the medium term.
Nigeria Corporate Analysis | Public Credit Rating Page 9
Forte Oil Plc
(Naira in millions except as noted)
Year end: 31 December Statement of comprehensive income
2012 2013 2014 2015 2016 1Q 2017
Turnover 90,984.2 128,027.7 170,128.0 124,617.2 148,605.3 33,004.0 EBITDA 3,341.7 2,946.2 9,796.5 8,903.8 12,297.5 4,292.3 Depreciation (735.9) (1,184.6) (2,157.6) (2,649.9) (2,988.4) (1,148.0) Operating income 2,605.8 1,761.7 7,638.9 6,253.9 9,309.1 3,144.3 Net finance charges/finance cost (1,721.6) 254.5 (2,130.4) (1,675.8) (4,281.9) (1,577.1) Other gains/losses inc. fair value movements 0.0 0.0 0.0 0.0 295.6 481.0 Other operating income/expense 265.6 4,508.4 497.9 2,434.3 17.9 1.6 NPBT 1,149.8 6,524.6 6,006.3 7,012.4 5,340.7 2,049.8 Taxation charge (142.3) (1,520.2) (1,549.7) (1,218.4) (2,449.8) (165.3) Profit after tax from continued operations 1,007.5 5,004.4 4,456.6 5,794.1 2,890.9 1,884.5
Statement of cash flows Cash generated by operations 3,577.9 6,135.9 10,380.0 10,919.9 12,760.3 4,865.0 Utilised to increase working capital (1,356.6) (5,818.4) (6,625.1) 2,937.0 3,325.4 (6,145.5) Net finance charges (1,721.6) 254.5 (2,130.4) (1,675.8) (4,281.9) (1,577.1) Taxation paid (290.3) (249.9) (1,589.6) (1,117.1) (1,753.5) 0.0 Cash flow from operations 209.4 322.2 34.9 11,064.0 10,050.3 (2,857.7) Maintenance capex‡ (735.9) (1,184.6) (2,157.6) (2,649.9) (2,988.4) (236.2) Discretionary cash flow from operations (526.5) (862.4) (2,122.8) 8,414.2 7,061.8 (3,093.9) Dividends paid 0.0 0.0 (4,321.1) (2,730.5) (5,991.7) (245.0) Retained cash flow (526.5) (862.4) (6,443.9) 5,683.7 1,070.2 (3,338.9) Net expansionary capex (193.9) (43,738.1) (2,226.7) (7,919.8) (6,795.7) 0.0 Investments and other (2,684.7) 3,712.3 (69.5) (183.4) (72.5) (17.6) Proceeds on sale of assets/investments 121.2 1,621.9 6.3 632.6 67.9 2.7 Shares issued/Deposit for share 754.7 29,598.9 1,770.0 1,770.0 0.0 0.0 Cash movement: (increase)/decrease (212.0) (2,930.4) (9,284.6) 4,363.1 (5,317.4) 3,489.9 Borrowings: increase/(decrease) 2,741.2 12,597.9 16,248.3 (1,187.6) 11,047.5 (136.1) Net increase/(decrease) in debt 2,529.2 9,667.5 6,963.7 3,175.6 5,730.1 3,353.8
Statement of financial position Ordinary shareholders interest 6,830.3 12,436.4 11,962.3 12,796.4 11,087.2 11,751.8 Outside shareholders interest 0.0 29,306.0 31,896.5 33,198.2 32,017.1 32,950.0 Pref shares and conv debentures 0.0 0.0 0.0 0.0 0.0 0.0 Total shareholders' interest 6,830.3 41,742.4 43,858.8 45,994.6 43,104.3 44,701.9 Short term debt 11,193.5 9,889.7 28,785.2 24,026.2 23,324.2 23,526.8 Long term debt 999.3 14,901.1 12,253.8 13,951.7 26,099.2 25,873.9 Total interest-bearing debt 12,192.8 24,790.8 41,039.1 37,977.8 49,423.4 49,400.8 Interest-free liabilities 22,737.3 37,537.9 53,864.6 37,499.4 47,999.5 49,193.2 Total liabilities 41,760.4 104,071.1 138,762.4 121,471.8 140,527.2 143,295.8 Fixed assets 8,967.6 51,843.6 54,253.3 62,420.2 69,297.6 68,360.3 Investments and other 8,073.5 2,942.5 2,072.3 2,004.7 1,966.3 1,985.3 Cash and cash equivalent 3,868.4 6,789.6 16,062.2 11,700.8 17,043.9 13,558.6 Other current assets 20,850.9 42,495.4 66,374.7 45,346.1 52,219.4 59,391.6 Total assets 41,760.4 104,071.1 138,762.4 121,471.8 140,527.2 143,295.8
Ratios Cash flow: Operating cash flow : total debt (%) 1.7 1.3 0.1 29.1 20.3 neg Discretionary cash flow : net debt (%) neg neg neg 32.0 21.8 neg
Profitability: Turnover growth (%) (22.2) 40.7 32.9 (26.8) 19.2 (11.2) Gross profit margin (%) 11.2 9.6 10.9 14.7 13.9 17.6 EBITDA : revenues (%) 3.7 2.3 5.8 7.1 8.3 13.0 Operating profit margin (%) 2.9 1.4 4.5 5.0 6.3 9.5 EBITDA : average total assets (%) 8.4 4.4 8.9 7.7 10.5 13.6 Return on equity (%) 15.9 51.9 36.5 46.8 24.2 66.0
Coverage: Operating income : gross interest (x) 1.4 0.9 1.8 1.2 1.5 1.5 Operating income : net interest (x) 1.5 n.a 3.6 3.7 2.2 2.0
Activity and liquidity: Trading assets turnover (x) (58.9) 49.2 17.8 10.4 16.7 12.6 Days receivable outstanding (days) 66.9 63.4 91.3 129.6 100.4 134.0 Current ratio (:1) 0.8 1.1 1.0 1.0 1.0 1.0
Capitalisation: Net debt: equity (%) 121.9 43.1 56.9 57.1 75.1 80.2 Total debt: equity (%) 178.5 59.4 93.6 82.6 114.7 110.5 Net debt: EBITDA (%) 249.1 611.0 255.0 295.1 263.3 208.8 Total debt: EBITDA (%) 364.9 841.4 418.9 426.5 401.9 287.7
‡Depreciation used as a proxy for maintenance of capex expenditure. **3 months period to March 2017
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SALIENT POINTS OF ACCORDED RATINGS
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