Low Returns from Power Business Dipped Transcorp Half Year Earnings

Coy:  TRANSNATIONAL CORPORATION OF NIGERIA PLC (TRANSCORP)
Rating: Hold
Current Market Price: N1.01

Current Dividend: N0.03
Year High: N1.71
Year Low: N1.00
Fair Value: N1.14
By: Jeariogbe Tunde Segun (Equity Analyst)

Key Investment Ratios

• This report on Transcorp, access the just released half year financial statistics for the period ended 30^th June, 2019. We compared same with similar result in 2018 to establish growth.
• Considering the drop experienced in the Turnover for the year as against the corresponding quarter in 2018, we stepped down our valuation for Transcorp, maintaining our judgement to visible returns (narrowed down to three (3) years projection).
• In our opinion, this move is necessary since the Power Business is the reason why the turnover dropped as against the popular expectation that it will improve Transcorp profit through all quarter in 2019. Please note that Turnover from all other business of the firm grows over comparable period except the power arm of the company
• Capacity Charge realised through the six months stood at N10.56 billion as against the N16.24 billion generated from this item at the end of 2018 half year
• Similarly, Energy sent out generated Turnover of N17.84 billion compared to the N29.79 billion generated at the end of 2018 half year business cycle

Company figures

• Turnover Figure reported at the end of the period dropped by 30.19% to N37.76 billion as against N54.08 billion in 2018
• Cost of Sales maintained the same rate over Turnover and dropped by 30.61% from the previous N29.51 billion to N20.48 billion
• Operating Profit equally dropped to N11.16 billion same as 35.62% from the N17.34 billion achieved in 2018
• In the same trend, Operating Expenses dropped by 14.24% to stand at the current estimate of N6.53 billion versus N7.61 billion. Please note that two items were missing in this year’s Opex as against last year; they are; Provision for Impairment and Loss on Assets Disposal
• Meanwhile Finance Cost for the period is estimated at N7.38 billion same as 47.25% above the N5.01 accounted for on this item in its 2018 half year financials
• Profit before Tax Expense stood at N5.05 billion having stepped down by 57.72% from the previously reported N11.94 billion in 2018
• Tax Expense was estimated at N435.93 million compared to the N1.06 billion in 2018
• Profit for the period stood at N4.61 billion, this is 57.57% below the N10.87 billion profit made at the end of the first six (6) months of 2018

• Current Assets is currently valued at N102.93 billion compared to N94.60 billion stated in its 2018 half year result
• Non-Current Assets inched up by 4.50% as it is now valued at N204.44 billion as against N195.65 billion reported in 2018
• Current Liabilities stood at N132.43 billion, same as 26.16% above the N104.97 billion in 2018. Please note that under current liabilities, the company have a direct borrowings of N43.39 billion (2018-N30.93 billion)
• Non-Current Liabilities is now valued at N65.71 billion against N79.42 billion in 2018. Also note that Direct borrowings under this item is N56.32 billion (2018- N69.85 billion)
• Thus, Net Assets is estimated at N109.24 billion, 3.19% above the N105.86 billion estimated at the end 2018 half year business cycle
• Retained Earnings improved by 15.51% to N41.42 billion from N35.86 billion

Financial Strength/Solvency Ratios

• Debt Ratio is currently estimated at 0.64x almost same as 2018 estimate. This implies that, Total Liabilities is same as 64% of Total Assets.
• Total Debt to Equity was equally estimated at 1.81x as against 1.74x estimated in the comparable quarter
• It was also estimated that Total Equity is same as 36% of the Total Assets of the company, this is about same as previous quarter’s estimate

Profitability Ratios

• EBITDA margin estimated for the period stood at 29.57%, same as 7.79% below the 32.07% estimated from the corresponding quarters’ numbers
• Pre-Tax Margin equally dropped by 39.44% to 13.37% against the 22.08% estimated at the end of 2018 half year
• Effective Tax Rate was fairly stable within the two periods compared in this report
• Cost of Sales maintained same impact on the Turnover figure within the two quarters being compared in this report. Currently, Cost of Sales is 54.24% of the Turnover figure
• Return on Equity stood at 4.22% against 10.22% of 2018. Please note that the return dropped by 58.88% between the two periods compared

Efficiency Ratios

• Operating Expenses to Turnover value is same as 17.30%, this is 22.84% growth from the 14.08% estimated in its 2018 half year financials
• Turnover to Total Assets Ratios stood at 12.28% against 18.63%, this is 34.08% drop in efficiency over comparable period of 2018
• Working Capital Ratio a ratio that indicates a company’s effectiveness in using its working capital turned negative, this implies that the Liabilities that falls due within the year is more than the available Current Assets. Depending on the company’s business model, this can either be positive or negative
• Further testing the company efficiency, we tested the Working Capital Ratio, which further confirmed that Current Liabilities is higher than Current Assets. The ratio currently stood at 0.78x against 0.90x

Investment/Valuation Ratios

• At the end of the first three months of 2019, the company earnings per unit shares dropped by 57.57% from the previously estimated N0.27 to N0.11
• P/E-Ratio improved by 88.93% having moved to 8.90x from 4.71x
• The said Earnings per Share is a 11.24% yield of the current market price of Transcorp Plc’s shares on the floor of the exchange as at the time the result was made available to the investing public
• The Book Value of Transcorp is currently estimated at N2.69 this is marginally above the market value of the Coy on the floor of the exchange
• Confirming and under-priced status of Transcorp shares on the floor of the exchange is the Price to Book Value which stood below unity (0.38x)

Valuation

Strictly adopting a conservative valuation models, we reduced our reliant on the last dividend pay-out and concentrated on the company’s book. We also reduced our growth expectations of and our number of forecasted years. Thus, we fairly priced each units of Transcorp Shares at N1.14 and Rated it a Hold.