Looking at Transcorp’s annual report for 2013 reveals how far the company has come since its takeover by Tony Elumelu and his Heirs Holding Investment Company. In its latest result the Group announced record profit after tax of N6.9billion representing a 176% increase over 2012 N2.5billion. But that is not all you should know about the result. Here are 10 other very important take outs; [upme_private]
- Following this result Transcorp declared its first ever dividend of 5kob per share. This will cost the company about N2.2billion. Transcorp has averaged about N3 in the last one year making this dividend a paltry yield of just 1.6%. Really small right?
- Transcorp is basically a Holdco with very little operating activities and thus relying on its subsidiaries as operating entities that basically provides the bulk of its revenue. This can be a very deceptive structure for an uninformed investor especially as it doesn’t lay claim to a sizeable portion of the profits the Group declares. I will throw more light on this as we dig further.
- Out of the N6.9billion declared by the group Transcorp Plc (which is the company quoted on the NSE) only lays claim to N4billion (57%) of that amount with Non-Controlling Interest (NCI) having N2.9billion. It was N1.1billion and N1.3billion for Transcorp and the NCI in 2012 respectively.
- This basically means the value added to shareholders of Transcorp from this result is N4billion. Out of this N4billion declared by the group Transcorp Plc was paid dividend of N2.1billion. So essentially it earned N2.1billion in 2013 as dividends from its various subsidiaries. This in my opinion should be the focus of any investor….how much does Transcorp actually earn from its various subsidiaries and from its own proprietary transactions.
- Apart from the N2.1billion dividend earned Transcorp also earned another N4billion mostly from what it called “fair value gains” basically an accounting profit from its revalued investments. It is most likely holding investment securities marked to market which allows for it to declare profits when the value of the investments exceeds its cost. After all expenses, Transcorp made for its shareholders profit after tax of N2.8billion. From here the proposed dividend of N2.1billion will be paid.
- Transcorp has a staff strength of 24 people and earned salaries of about N365million (2012: N254.9million) about N15million per staff. The group has a staff strength of 1902 and a salary of N2.65billion (2012: N2.64billion) or N1.4million per staff.
- Starting from 2013 Transcorp will be paying Hertz Holding fees for what it called “provision of corporate and financial advisory services, governance support, brand and communications services and business development support”. It was enshrined in a technical service agreement. This fees cost the company N700million or 11% of its revenue plus other income this year. It is in fact 32% of its Revenue minus income from fair value investments (other Income). This cost is incurred by Transcorp and does not pass on to the subsidiaries
- More than 80% of the group revenue was derived from its hotel subsidiary. It was over 90% in 2012. The major difference was the N3.4billion earned from its newly acquired Ughelli Power plant. It is even more remarkable that profit after tax from its Ugheli power plant was N2billion. A higher return (58.8%) when compared to the N4.4billion (27%) from its hospitality arm. The power plant only just joined the group in November so this may just be one month’s result? Its Juice making company only posted revenue of N14.8million and basically posted a loss after tax of N198.9million.
- Transcorp owns 65% of Ughelli Power PCL and 51% of Transcorp Hotels and Tourism Services Ltd its two major contributor to revenue. As such it can not earn more that 65% and 51% of what those companies make respectively as dividends. Its acquisition of Ughelli Power plant is a game changer and one that can provide immense value to shareholders on the long run. Transcorp also owns 99% of Transcorp Energy Limited a company that currently owns an Oil Mining License.
- Transcorp runs a model whereby it goes into technical and commercial partnership with entities locally or abroad. The entities typically invest along with Transcorp in its subsidiaries which is why Transcorp hardly owns more than 70% of most of its subsidiaries. For example, Transcorp owns 100% of Ughelli Power Plc through its special purpose vehicle, Transcorp Ughelli Power Limited (TUPL). However, it owns only 65% of TUPL. I believe when it strikes oil it will have to sell part of its holdings in Transcorp Energy Limited.
Transcorp appears to be a company in the right trajectory. It’s acquisitions in the power sector as well as potential revenue coming from upstream activities is a compelling argument for a rewarding future for the company. However, the company still relies heavily on the influence of Tony Elumelu to succeed despite the very commendable efforts of its CEO, Obinna Ufudo. That is too much risk for a company with so much potential especially in a country vastly associated with nepotic leadership.
Its share price is also a source of worry for me even though when you look at the potential the company has you feel compelled to believe it is well priced. Experience however shows that when you assign huge values to companies based on their perceived potentials the returns drop over the long term.
Download Transcorp annual report Here[/upme_private]