Transcorp Plc closed the week at a price of N2.45 drawing the straight into our radar as a potential buy. Whilst N2.19 is still Transcorp’s lowest share price in the last one year, the current price looks quite cheap considering that Transcorp was once as high as N6. But is Transcorp really cheap and if yes is it the best time to buy?
Transcorp earns most of its money from two major subsidiary which it partly owns. Transcorp Hotels and Ughelli Power Plant remain the two dominant contributors to revenue.
Hotels in Nigeria suffered much in 2014 as the fear of Ebola drove most business visitors away. The height of this scare was in the third quarter of 2014 and beginning of the fourth quarter 2014. The rapid fall in the price of oil late last year is also a huge factor as most businesses world-wide cut down heavily on budgets. Typically travel budgets are usually the first to be cut down when companies decide to be prudent. We expect the impact of this to be negative on Transcorp Hotels result for 2013 and should take a slice of its profits. Revenue from the hotel and F&B division was down 2.6% and 3% respectively and we project profits will be down by at least 5% for its hospitality section.
Ughelli Power plant helped push Transcorp Profits in 2013 to N6.9billion from N2.7billion in 2012. We expect power to play a major role this year as well. The acquisition helped Transcorp attract high valuations for most of 2014 as investors expected a huge growth in earnings. Whilst the potential still remain there, the power sector is still a long way to go from being the huge growth driver everyone expects. Transcorp will have to spend on refurbishing its power plant whilst it adjust to new increase in gas bills. For example, cost of sales and operating expenses has risen considerably looking at its 9 months result. Cost of sale rose from direct cost of repairs to its power plants as well as depreciation of assets. Operating expenses also rose in tandem rising by 40% YoY with “other operating expenses” contributing to half of that increase and staff cost the other half.
In the light of higher cost and lower margins we project earnings per share will rise by about 50% at most at the end of 2014 and will possibly slow further in the latter years.
A lot of stocks have taken a beating in the last few months as stocks react to market volatility ensuing from the massive sell-offs that have followed stocks as oil prices drop and Nigerian elections approach. Nevertheless, our valuation of Transcorp Plc suggest a price between N2 and N2.5. Why?
Dividends – Transcorp paid dividends last year for the first time ever when it declared 5 kobo dividends translating to about 28% of the groups earnings per share for the year of N12. This year we project group earnings per share to fall within 17 and 21 kobo. Left to choose a target we would say about 18kobo per share. We also project Transcorp will pay about 50% more in dividends this year compared to last, which will take dividends to about 7.5kobo per share. That dividend should attract a 3% dividend yield for Transcorp (very low by our metrics but in line with its valuation after dividend announcements) giving us an estimated value of about N2.5. A DCF valuation gave us an even smaller valuation of N2.
Owner Factor – The value of some Nigerian stocks have come to be more associated with the perception of the owners or drivers of the company. It is a hidden premium the market recognizes even if investors don’t admit it. Tony Elumelu is one of those names you can’t help but know. People like him have a way of influencing how the market perceives his stock and as such is a crucial factor in valuing the share price. It’s difficult to quantify what the premium on the name generates as it can be anything from 10% to even 100%. We will use a 25% premium on N2.5 which gives us a price of about N3. We believe the owners of the company will be comfortable with a share valuation that is between N3 and N4 on the average. Whilst the current volatility in the market may not allow this, it is likely this will be the target price once the elections are over and the market stabilizes.
Should we decide to buy Transcorp we will be doing so on the back of the following;
Short term – Buy below N2.2, Potential Upside 50% within 6 months with volatility all through.
Long Term – Buy below N2.5, Potential Upside 100% within two years.