Transcorp 2018: Outstanding Earnings, Robust Profit, Lean Payout

Transcorp 2018: Outstanding Earnings, Robust Profit, Lean Payout


Post Views: 496 It is obvious that Transnational Corporation of Nigerian has set a new record in corporate governance and performance as the company j...

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It is obvious that Transnational Corporation of Nigerian has set a new record in corporate governance and performance as the company joined the early filers, releasing its numbers earlier than previous years, while at the same time revealing top and bottom-line growth.
The performance have been adjudged best in the company’s history, a situation attributed to its capacity building efforts and continued investment in recent times that are now yielding results as revealed by quarterly earnings reports and full year 2018 scorecards. We hope the management of Transcorp will maintain this pace going into the future.
Earnings during the financial year ended December 31, 2018 was once again boosted by increased capacity in the power and hospitality business segments which contributed 76.72% and 15.41% respectively top line.
In the new financial year, the company is likely to post better numbers, as its oil and gas business is projected to begin crude oil drilling in commercial quantity, going by what the management told an investors’ conference last year. This will significantly broaden the company’s earnings and profit base, even as the optimism is dampened by the instability in the price of crude and the cut in Nigeria’s production output by oil cartel- the Organisation of Petroleum Exporting Countries (OPEC). Recall that President Muhammadu Buhari, on Thursday, in Abuja, promised a special envoy of the Saudi government that Nigeria could consider sticking to the OPEC quota of 1.9m barrels per day of oil to attract higher prices.
Transcorp turnover for the period under review grew by 29.74% to N104.16bn, from N80.28bn in 2017, despite the seemingly high cost of sales. Profit before tax inched to N22.4bn, a significant 80.02% growth over the N12.31bn of 2017, while the flat tax expenses at N1.77bn resulted in net profit of N20.63bn, representing 94.46% jump, when compared with N10.61 billionin 2017. This followed the continued decline in cost component as shown in the Net Profit Margin ratio of 19.80%, as against 13.21% in the previous year.

In its financial report, Transcorp split its profit for the year into N9.31bn equity holders of the parent company and N11.31bn, non-controlling interest, thereby reducing it EPS from 51 kobo to 23 kobo, compared to 26 kobo in 2017. If the company wants to do book building it should be made clear rather than confusing investing public.
Effective Earnings Per Share (EPS) for the period, based on the above reported net income, came to 51 kobo, compared to 26kobo in 2017, resulting in Earnings Yield of 29.68% over the current market price as at the release date of the financials. Book Value improved to N2.59, up from the N2.35 achieved in the corresponding period of 2017, which means investors’ waiting period dropped significantly on the strength of the improved earnings power to 3.376x, from 7.09x.
Given that management has effectively improved on the group’s track record by surpassing the 2017 full-year performance level in 2018, the low payout was a disappointment for investors and indeed the market expressed its dismay immediately at the three kobo dividend per share declared by the directors. With a Book Value of N2.59 per share, we have conservatively valued each unit of Transcorp Plc at N3.50. And recommend a BUY for traders and investors seeking to play the stock by its trend and expected performance in 2019.

Transcorp’s price action revealed that the stock trended down between January 19, 2018 and August 24, 2018 when it resisted further decline and reversed up to form a double bottom chart pattern by December 7, thereby ushering in this uptrend that was short-lived by the low payout that triggered the two-day pullback. Market sentiments before the ongoing earnings season had been positive due to improving fundamentals of the company despite the prevailing political risk situation in the country.
With the current retracement wave, ahead of February 28 markdown date and expected improvement in the company’s earnings power, market players should look the way of this stock. Investors with medium and long-term investment horizon should keep their gaze on Transcorp Plc.

Company History
In the power sector, Transcorp Power Limited (TPL) is the entity that resulted from the merger of Ughelli Power Plc (UPP) and Transcorp Ughelli Power Limited (TUPL) (both located in Delta State) in November 2015.
In 2012, TUPL won the bid to acquire UPP, one of the six power generation companies of the unbundled Power Holding Company of Nigeria (PHCN) when it was privatised by the Federal Government. TPL has successfully increased the plant’s functional capacity from pre-acquisition level of 169 megawatts in November 2013 to 634mw, which is close to pre-acquisition maximum capacity of 670mw set by the Bureau of Public Enterprises (BPE). There are plans to further grow its capacity to over 3,000mw over a five-year period.
Transcorp Hotels Plc is the group’s hospitality subsidiary and currently owns Transcorp Hilton Abuja and Transcorp (Metropolitan) Hotels Calabar. In addition, it signed a management agreement with Hilton Worldwide to commence the development of a Transcorp Hilton Ikoyi, Lagos, as well as the Transcorp Hilton Port Harcourt. The completion of strategic expansion projects to upgrade current hotels and develop new hotels will result in Transcorp having the largest number of hotel rooms by any investor in Nigeria.
In the oil & gas sector, Transcorp Energy Limited, a fully owned subsidiary, established in 2008, oversees a joint venture agreement with Sacoil Holdings Limited (Sacoil) to develop its OPL 281 asset in collaboration with Energy Equity Resources Limited (EER). Production was expected to commence on this asset before the end of 2018.

2018 Performance Analysis
The company’s impressive performance kicked off with it first quarter earnings per share of 16 kobo which continued to trend up, hitting 27 kobo by half-year and 39 kobo in nine months, before finishing the year at 51 kobo. Arising from the forgoing, we project first quarter 2019 EPS of 24 kobo, as management create value for stakeholders in the new financial year.

Five Years Performance Analysis
The performance of Transcorp Plc over the past five years has been mixed and unstable, reflecting the different challenges it faced under previous owners and managements, especially in the its tortuous formative years during which its price collapse from N10 each, to the then floor of 50 kobo. There was however a turnaround in 2017, which was sustained in 2018 with the company posting its most outstanding performance so far in its history. Revenue CAGR stood at 30.39% between 2014 and 2018, with growth impacted by contribution from its power division.
Profitability has been unstable also. It rebounded to N10.61bn in 2017 after the 2016 negative account, recording 94.46% growth to N20.63 billion in 2018.
Book Value expanded by a 5-year CAGR of 17.38% from N89.75bn in 2014, while historical dividend payout also showed inconsistency since it started paying in 2013. The company has rewarded shareholders in five of the last six financial years.

Estimated Performance Ratios
Transcorp’s Earnings Per Share for the five-year period has been undulating, reflecting the unstable business environment in the various sectors the company operates in but with the continued capacity building and investment over the years, the company’s earnings power is gradually becoming stable. Earnings per share increased from 0.09 kobo in 2014 to 51 kobo in 2018 after declining first to 5 kobo in 2015, after which it slipped into negative position of three kobo in 2016, before a rebound in 2017 to EPS of 26 kobo. The relatively low price and improving earnings have reduced investors waiting period to 3.37x at the market value as at released date, from ahigh Price/Earnings Ratio of 41.01x in 2014.
Book value for the period grown from N2.32 in 2014 to N2.59, which reflects a undervalued state at the market price. Other performance ratios were mixed, while some are looking down, especially price to earnings ratio, return on equity and profit margin indicating improvement in the company’s performance since 2017.