FORTUNE OIL (LSE:FTO)
Stock to Watch: Fortune Oil
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With the FTSE SmallCap shares in Fortune Oil (FTO) yo-yoing between 10p and 12p after a series of transformational announcements at end-December, what prospects now for this circa £200 million company?
Fortune has since the 1990s been quite a trading favourite for private investors, its chart a series of peaks and troughs. After nearly doubling close to 15p in the first half of last year, the price then plunged to 9p with the wider market falls - despite a track record of strong profit growth and prospects.
Fortune is a China-focused business engaged in natural gas, oil terminals, aviation fuel supply and coal bed methane exploration. A Chinese managed company makes for advantages in the wheels and deals of commercial life, although a latest partner in some of the deals announced in December remains under house arrest for embezzlement - enough to raise eyebrows.
So not only do you have to assume the Chinese authorities can avoid an economic hard landing, but also Fortune's choice of partner will not result in reputational problems that for example have dogged the AIM-listed shares in LSE:ACHL:Asian Citrus Holdings, the Chinese orange grower listed here and in Hong Kong. Despite this potential image issue, the story involves an intriguing bid situation and Fortune is becoming quite a case study for investing directly in Chinese business.
An interim management statement for the third quarter of 2011 read mixed across group operations although some of the downturn involved disposal of subsidiaries at end-2010. Mid-November, the group's cash balance continued to exceed loan balance, a healthy position for a growing business.
The first three updates in December affirmed organic growth, while the last two involved new ways to develop its natural gas business in China. Long-term energy demand in this part of the world should be a robust theme and with bullish forecasts linked to the developments, Fortune should be interesting to follow.
On 16 and 18 December there were two operational updates. In natural gas, a £20 million liquefied natural gas (LNG) plant is to be built in Xinyang over two years, and an agreement has been made with a national shipping group to install LNG refuelling stations inside its dockyards. Secondly in aviation refuelling, Fortune has expansion aims to double the number of airports it operates to 30 (airports planned or under construction).
The 22-29 December strategic announcements are more intriguing as to natural gas prospects and one of the partners involved. Firstly, Dart Energy has bought another 5% (up to 50% holding) of Fortune Liulin Gas for $4 million (c£2.6 million), this price implying a total project value of £52 million equivalent with £26 million for Fortune Oil's share. First gas sales are expected this year. The intriguing aspect which is attracting press attention is how Fortune has taken a 2% stake in China Gas Holdings for £24.2 million, this being China's largest independent natural gas company which has recently rejected a takeover approach.
And lastly, Fortune has formed a new 50:50 joint venture (JV), China Gas Group, with Liu Minghui, a substantial shareholder in China Gas Holdings - a JV with a total value of about £56 million. Liu Minghui was managing director of CGH until a year ago, when embezzlement allegations hit. CGH is the country's largest independent natural gas company, serving over 150 cities, just recently the target of a $2.2 billion offer from the state oil giant Sinopec and ENN Energy Holdings - a bid that was rejected as significantly undervaluing CGH.
Notwithstanding potential controversy over Liu Minghiu - which Fortune and its advisers should have weighed up anyway and judged it still worth the alliance - Fortune is positioning itself determinedly for growth in natural gas use in China. "Long-term Chinese energy demand" must be among the top 10 of global investment themes at this early stage in the millennium.
Further reflecting on the late December announcements, they show how a Chinese domestic company is best placed to open up investment opportunities on the mainland, with all the connectivity and deal-making skills involved. It's hard to imagine a British management winning such a slew of progress.
Company REFS does not show any published independent research, however VSA Capital, which is an adviser to Fortune, issued projections on 4 January for net attributable profit to grow from £13.1 million in 2010 to £14.4 million in 2011, then a jump to £17.5 million in 2012 and £26.7 million in 2013. This is impressive, if achievable, on a two-year view - and would distinguish Fortune in an otherwise low-growth environment. Most likely the numbers reflect some guidance from Fortune's directors.
With nearly two billion shares in issue (explaining the penny share status), earnings per share are projected to rise from 0.7p near 0.9p this year and over 1.3p in 2013 - hence a single-figure price-earnings multiple beckons. Dividends, which commenced in 2010, are projected at 0.16p for 2011, 0.18p for 2012 and 0.25p in 2013 - a yield near 2.5% based on the current market price of 10.5p.
Financing and the balance sheet look robust in support of growth. Last April, a $180 million, three-year loan agreement was signed in order to maximise borrowing capacity and lock in low-cost financing before Asia-Pacific banks - China in particular - tighten liquidity aggressively. This could further come in handy for acquisitions of natural gas and resources companies that are struggling to access bank finance as China tightens monetary policy against inflation.
While the end-June 2011 balance sheet had £11.5 million short-term debt and £56.1 million long-term debt, these were exceeded by £87.3 million cash - although the variables will have changed after the latest deals. Of £154 million non-current assets, £35.5 million involved goodwill and intangibles, and the ratio of current assets to current liabilities was nearly twice.
Despite a question mark over one of Fortune's partners, the company's vigour in Chinese energy - underlined by the late December news and early January boost to forecasts - makes this share one to watch for higher risk/reward investors.
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