Transcorp Plc H1 Comes Below Market Expectations, Betrays Sorry State Of Nigeria’s Economy

Transnational Corporation of Nigeria Plc, one of the country’s fastest-growing conglomerates on the Nigerian Stock Exchange (NSE), recently released its earnings report for the 2019 half-year ended June 30, as it continues to raise its game in the area of corporate governance, remaining a consistent early filer on a yearly and quarterly basis.
The numbers revealed declining top and bottom lines, thereby disappointing investors, especially considering its years of restructuring, capacity building and investment which has not reflected on the earnings reports under consideration.
The group seemed to be silent on how far it has gone in its ongoing oil prospecting which it said last year would begin to impact its books positively from February this year, long before the news of its bid for Afam Energy plants.
It may be necessary, going forward, for the management of Transcorp Plc to re-strategize and reposition its services and boost performance, while creating value for all its stakeholders.
Transcorp earnings for the period under review was deflated by low sales in its energy business segment, with capacity charge and profit fell to N17.84 billion and N10.56 billion respectively, from N29.79 billion and N16.24 billion in the corresponding period of 2018, following which the marginal growth recorded by the hospitality business segment pale into insignificance.
Turnover for the period dropped by 30.19% to N37.76 billion, from the previous year’s N54.09 billion, despite the seemingly decline in cost of sales, while profit before tax slipped to N5.05 billion from N11.94 billion, a significant 57.71% decline below the 2018 position. Provisions for tax stood at N435.73 million, as against the N1.06 billion reported in 2018, just as net profit stood at N4.61 billion, representing 57.63% decline when compared to N10.88 billion in 2018. This followed the continued increase in cost component as shown in the Net Profit Margin ratio of 12.22%, down significantly from the previous 20.11%.

The group produced actual Earnings Per Share (EPS) of 11kobo, down from 27kobo in the first half of 2018, which translates to Earnings Yield of 11.24% when benchmarked against the current market price as at the release date of the financials.
Within the period, Book Value however improved marginally to N2.69, up from the N2.60 achieved in the corresponding period of 2018, which means the stock is still undervalued and has a high margin of safety, while investors waiting period increased slightly on the strength of the weak earnings power to 2.22x6x, from 1.18x.
On the current mood of the macroeconomic environment and unimpressive numbers from the group’s track record in the last two quarters of 2019, on the strength of the company’s Price/Earnings ratio of 2.22x and Book Value of N2.69 per share, we have conservatively valued shares of Transform Plc at N2.10 per unit. We also recommend a BUY for all investment objectives, considering the nature of its services and sectors in which it operates.

The price action above shows a downtrend since the last week of February when Transcorp Plc released its 2018 full-year earnings report and offered a dividend a three kobo dividend. The stock continues to oscillate and side trended on low volume traded before the recent pull-back that has created an entry opportunity for short and long term investors. Transcorp Plc resisted further decline after forming a multiple bottom chart pattern since August 24, 2018, before finally breaking down the yellow line recently. Market sentiments before the ongoing earnings season had been negative due to the low market liquidity and weak economic fundamentals. The stock’s upside potential is high and recovery is underway.

Company History
In the power sector, Transcorp Power Limited (TPL) is the resultant entity from the November 2015 merger of Ughelli Power Plc (UPP) and Transcorp Ughelli Power Limited (TUPL), both located in Delta State.
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) during the Federal Government’s privatization exercise. TPL has successfully increased the plant’s functional capacity from the pre-acquisition level of 169megawatts in November 2013 to 634mw, which is close to a 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 is yet to commence on this asset.

Five-Year Performance Analysis
The performance of Transcorp Plc over the past five years has been mixed and unstable, reflecting the different challenges it faced under the previous owners and management, especially in 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 when the company posted its most outstanding performance so far in its history. Revenue CAGR stood at 30.39% between 2014 and 2018, with growth impacted by the contribution from its power division.
Profit has been unstable also, rebounding to N10.61 billion in 2017 after a negative 2016 account, as it recorded 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, given that it only started paying in 2013. The company has rewarded shareholders in five of the last six financial years.

Estimated Performance Ratios
Transcorp Plc’s Earnings Per Share for the five-year period has been undulating, reflecting the unstable business environment in the various sectors of operation. But with the continued capacity building and investment over the years, the group’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, following which it slipped into a negative position of three kobo in 2016, before the 2017 rebound to EPS of 26 kobo. The relatively low price and improved earnings have reduced investors’ waiting period to 3.37x at the market value as at released date, from a high Price/Earnings Ratio of 41.01x in 2014.
Book value for the period has grown from N2.32 in 2014 to N2.59, reflecting that it is undervalued, considering its market price. Other performance ratios were mixed, with Price to Earnings ratio, Return on Equity and Profit Margin indicating improvement in the company’s performance since 2017.