Exactly a year ago, MSCI added Forte Oil and Ecobank Transnational Inc. (ETI) to its Frontier Market 100 index. Interestingly enough, both can be classified as turnaround companies.

ETI overcame serious corporate governance challenges in Q4 2013 and Q1 2014 culminating in the forced departure of the CEO at the time. Forte Oil (renamed from African Petroleum in Q4 2010) overcame serious business challenges caused by lax corporate governance and business ethics that led to an abysmal financial performance over multiple years.

The first light at the end of the tunnel for Forte Oil appeared during the 2012 fiscal year.

Exactly one year on (without adjusting for stock split of 1 for 5 for Forte Oil and 1 for 15 for ETI), ETI has risen 54% and Forte Oil 11%. My focus is actually on Forte Oil as I was assessing it for investment purposes…

Forte Oil

FACT: Total depreciation & amortization (D&A) stated on the income statement for FY 2014 is N1.16B ($5.8m)

My Opinion: Figure for depreciation and amortization as stated above is understated by N998m ($5m). The total D&A figure on the income statement should be N2.16B ($10.8m). Profit attributable to shareholders should be reduced by 43%. The same trend continued in Q1 2015 (despite the decline in profit as published) and profit attributable to shareholders should be N23.6m which is 91.6% less than the published figure of N279.3m.

Happenings: There were no notes to the accounts available for administrative expenses on the FY 2013 income statement despite the 96% increase from FY 2012.
In the same 2013 fiscal year, Note 11 provided a summary of line items that were factored in to obtain pre-tax income.

In the FY 2014 financials, where I deem (D&A) to be understated and therefore, net income attributable to shareholders overstated, the note providing a summary of line items that were factored in to obtain pre-tax income was conspicuously missing. Notes to the accounts for administrative expenses suddenly reappeared in the FY 2014 financials when a decline of 2% in administrative expenses was achieved.

I am not concerned if fund managers dump the stock, dive in for more or if the stock goes on a bullish run throughout this week. I am concerned that a highly visible company listed on the Nigerian Stock Exchange and part of the MSCI Frontier Market 100 index will attempt (in my opinion) to portray things not as they really are and attract false interest to its shares.

I have a lot more I can say on Forte Oil but, this will suffice for my message. This is one of the reasons why we have low P/Es across Nigerian banks. This company is a borrower from Nigerian banks. If some of the major companies banks are lending to are not coming clean, then, how clean can the banks they patronize be?

Cloud of suspicion that blows an ill wind and contributes to keeping banks’ prices less then five times above earnings in multiple cases.

*Jude Fejokwu
Senior Africa Investment Analyst