Transnational Corporation of Nigeria (Transcorp) PLC released its half-year results for the period ended June 2014 on the floor of the Nigerian Stock Exchange last week. The major indices, both top line and bottom line, showed massive growth year on year. Over the last couple of months the stock price had also shown massive growth, and the jury is out on whether the valuation of the stock is still compelling, given the jump in profits, or whether the growth had already been priced in.
The revenues grew by 176.5% between June 2013 and June 2014 from N7.67 billion to N21.21 billion, while the profit after tax grew by 177.3% from N2.49 billion to N6.89 billion within the same period. This showed a slight improvement of net profit margin from 32.4% to 32.5%. What were the drivers of this slight increase in net profit margin? We will examine the four elements of the net profit margin to arrive at what Transcorp was able to do right in the last one year. The gross profit margin dropped from 78.1% to 70.5%, which means that Transcorp was unable to handle their cost of sales within the period. The operating margin also declined from 66.6% to 65.2%, which means that Transcorp was unable to tackle operating costs effectively as revenue grew. The non-operating margin also declined from 90.5% to 82.2% – the company continued to struggle with the high cost of funds in the economy, just like every other company in Nigeria. Transcorp effective tax rate decreased from 31.2% to 14.1% within the same period. While Transcorp showed a massive increase in revenues, the company was unable to improve any of the other parameters in the income statement. They were only able to improve the net profit margin by playing around with taxes. Our conclusion is that the company may have decided to pursue growth in revenues and lost focus on keeping a lid on costs; hopefully, they will be able to turn this round in time.
We will now turn our attention to the quality of the revenues generated by Transcorp. Within the period under review, Transcorp grew revenues by 176.5% from N7.67 billion to N21.21 billion. Receivables also jumped by over 600% from N3.46 billion to N24.21 billion! This is a stupendous growth of over N20 billion in trade receivables. A look at the 2013 full year results showed trade receivables of N8.45 billion while the first quarter of 2013 figure stood at N41.60 billion. What could be responsible for this volatility in trade receivables? Apparently Transcorp is currently operating in the upstream sector of the Electricity Industry in Nigeria, and the Generating Companies (GENCOS) have been faced with massive trade receivables. The 2013 annual results did not show the breakdown of where the trade receivables came from; this could put the quality of revenues generated by the company in doubt. We hope Transcorp will be able to overcome this challenge, as this pose a serious red flag to the future earnings of the company.
How has Transcorp performed in terms of efficiency in the deployment of assets? The asset turnover improved from 19.9% to 27.6% within the period under the review. While the company has not be able to contain costs, at least they have been able to sweat their assets for every Naira invested; although, we still have our reservations on the quality of revenues generated within the period. The leverage ratio dropped slightly from 1.80x to 1.73x; this means that Transcorp has been able to reduce its debt burden slightly over the past one year. This could have been made possible because of the equity funds that company raised in the second half of 2013. Transcorp’s return on equity improved from 11.5% to 15.4% over the past twelve months. This is some good news for shareholders but the company needs to be taken to task in order to improve the abysmal cost control.
At the current price of N5.51, the stock is selling at a PE of 15.5x. For a stock that has been able to generate return on equity of only 15.4%, the market has apparently priced in the earnings growth. While the stock will make a good addition for growth investors, value investors would be strongly advised to look somewhere else for better deals. Perhaps, if the company takes cost control by the scruff of the neck over the next couple of months, it may just be worth adding to a value-oriented portfolio.
The writer Manasseh Egedegbe is a renowned Chartered Financial Analyst and we are proud to have him as a contributor to Nairametrics. You should follow him on twitter via his handle @knightofdelta.