Company: Transnational Corporations of Nigerian (TRANSCORP Plc)
Rating: BUY
Current Market Price: 1.85
Intrinsic Value: N3.23
Latest Cash Div: N0.02
By: Jeariogbe Tunde Segun (Equity Analyst)

Key Financial Tickers
• This analysis basically observed the financial statistics of Transnational Corporation of Nigeria (Transcorp Plc) for the full-year ended December 31, 2017. We shall however swiftly touch the just released financials for the first quarter ended March 31, 2018.
• In its score-card for the year ended December 31, 2017, the management of Transcorp announced a cash dividend of 2k per unit share of 50k each.
• The share price was subsequently adjusted for the dividend on April 18, 2018, implying that the qualification date was 17th April, 2018.
• The said dividend was electronically paid on May 2, 2018 to investors whose names appear in the company registrar as at the qualification date.
• We have observed that the management of Trascorp maintained the growth achieved in the full year financial through the first three month of 2018. Please see the table below for the first quarter 2018 earnings brief.

Strength
• Transcorp is presently operating within critical economic sectors of Nigeria: Power, hospitality and Energy.
• It also operates in the agricultural sector of the economy through Terago, a sector which is the major focus of this government. The federal government target is to explore opportunities in the sector to produce more FX and reduce the country’s risk to high oil proceeds. Unfortunately, the board had decided to put a hold on new investments in the company (Terago) and consider options for divesting its interest.
• The company closed the 2017 financial year with increase in available capacity (power sector) from 505 megawatts to 701mw. According to the management of Transcorp, there are plans to raise this to 800mw, thereby achieving its target of supplying 25% of the power consumed in the country.
• According to the President/Chief Executive of Transcorp Plc, the company maintained forward push towards developing OPL 281 oil block to achieve its work obligations under the Production Sharing Contract (PSC) entered with the state-owned Nigerian National Petroleum Corporation (NNPC).
• Although the year had been challenging in its hospitality business due to the rehabilitation work ongoing in its flagship Abuja edifice, even as it maintained leadership in the sector for which it bagged several awards within the year.

Challenges
• In our opinion, major challenges faced by this outstanding organization are:
 High financing cost
 Volatile foreign exchange (FX) market. Although the loss was managed in 2017, the company still sustained a loss of N4.554 billion.
 Low capital as against the high capital-intensive businesses engaged in by the company.
Please note that the stability in the FX rate encouraged the positive performance posted in 2017 financial year

Corporate Figures
• The Turnover figure improved over the corresponding year by 35.10%, rising to N80.28 billion from the N59.42 billion reported in 2016
• Operating profit on the other hand improved by 25.66% over previous year’s figure.
• Supported by reduced foreign exchange loss on financial activities, Profit before Tax (PBT) was positive as against the loss before tax reported in the 2016 financial year
• Similarly, the Profit after Tax (PAT) came out positive against the Loss after Tax of N1.126 billion reported last year despite tax credit
• Retained earnings grew by 17.48% to N31.96 billion as against the N27.207 billion of 2016.
• Total Assets for the group stood at N285.5bn in 2017, compared to N232.2bn in 2016. Increase in property plant and equipment and trade and other receivables accounted for growth in total assets.
• Meanwhile, Total Liabilities improved by 30.27% to N189.81 billion from N145.71 billion of 2016. Of this:
• Non-Current liabilities grew mildly by 3.21% from the N82.512 billion of 2016 to N85.158 billion.
• Current Liabilities improved the most by 65.59%. See the table below for details.

Liquidity/Risk Ratios
• The company used more debt to finance fixed assets during the year, this is an indication that the company is highly geared and the shareholders’ funds carry higher risk. Please understand that this ratio is high, especially when compared to the industry average of 29.13%.
• The current ratio is fairly below 1. The implication of this is that, should the company’s obligations fall due at the moment, it will encounter challenges in paying off. Please understand that although this reveals an unhealthy financial state at the moment, it does not imply a state of bankruptcy.
• Meanwhile, better than its peers, Transcorp enjoys more investor patronage, backed by the estimated beta value of over a unit.
• Justifying the state of financial weakness, the estimated interest coverage stood below 1 and far below industry average. It is also implying a tight interest obligation.

Profitability Ratios
• The Cost of Sales Margin increased by 10.96% over that of the corresponding full-year year 2016. Our estimates show that Cost of Sales is currently 54.63% as against the 49.24% in 2016. Although this percentage is fair enough, even as serious care must be taken to keep it low, considering the other major items that will eat into the profit.
• Due to increased finance cost and foreign exchange loss on financial activities, both PBT and PAT margins were down to 15.33% and 13.21% respectively
• Return on Average Equity is low at 11.08%, especially when we consider the level of interest yielding debts used to achieve this
• Similarly, we are of the opinion that the Return achieved on Average Assets is low at 3.72%.

Efficiency Ratios
• The management fairly outrun the Total Asset Turnover achieved in 2016 as the ratio only improved by 9.85% from the 25.60% estimated in 2016 to the current 28.12%
• Equity Turnover is commendable at 83.89% a 22.03% improvement from the 68.74% achieved in 2016
• Equity multiplier is considered high at 2.98x an increase of 11.009% from the 2.69x in the previous financial year. This ratio further confirms that the company has been using more debt than equity.

Investment Ratios
• Unlike the loss after tax of 2016 financial year, Transcorp in 2017 earned N0.26 per share Transcorp
• Since the company just exited a loss position, we have found all investment ratios attractive
• For example, the Price to Book Value is below 1 which indicates an under priced position for Transcorp shares. Consequently:
• The Book Value is currently estimated at N2.35 which is 27.03% below the market price as at the date this financial figure was made available to the investing public.
• Operating Expenses margin is fair enough at 13.21%.

First Quarter 2018 Financial Indices
• Outstandingly, all income statement of Transcorp Plc improved over those of the corresponding period of 2017
 Turnover improved by 66.81% from N15.767 billion to N26.302 billion
 Profit before tax soared by 242.14% over the similar quarter of 2017. The figure grew to N5.935 billion as against N1.734 billion last year
 Profit after Tax equally appreciated over same period in 2017 by 261.60%. Currently standing at N5.410 billion, compared to N1.496 billion last year.
• Total Assets equally improved by 20.76% above last Q1 estimate.
• Good enough, Non-Current Liabilities dropped from the 2017 figure by 11.89%. Please note that the Non-Current Liabilities posted for the first three months of 2018 is N83.452 billion, compared to N94.715 billion last year
• Net Assets posted for the period is now N101.84 billion, this is 15% above the previous N88.55 billion
• On the strength of the above mentioned:
 Profit per share for the reported three months is 14k compared to the 4k earned in 2017
 The said earnings is a yield of 7.94% over the current market price as at the release date of the financials
 Book Value improved to N2.63 above the N2.35 achieved at the end of 2017 financial year
 In conclusion, the management of Transcorp effectively maintained the improvement achieved in the 2017 full year financials. Nevertheless, the risk factors are still very much in place and will need timely attention of the management.
Valuation
• In valuing the share price of Transcorp, we adjusted our valuation model to consider the non-payment of dividend by Transcorp over the years, until the period under consideration. We classified it amongst our growth stock basket and therefore anticipate an improvement in coming years. We also put into consideration the sensitive nature of Transcorp Plc operations in the nation’s economy, bearing in mind various regulations that may either dampen or boost its performance.
• Going by the above, we have conservatively valued each unit of Transcorp at N3.23. Please note that should the current growth status be maintained till the end of 2018, the valuation may be upgraded depending on the various economic indices at that moment.

Recommendation: For long term investment options, we recommend a BUY, while traders may HOLD and play the equity by trend.