C&I Leasing Plc has been flying lately and has continued to catch the eye of a number of retail investors. The share price has risen from 50kobo to as high as 72kobo within a month and closed at 69 kobo on Friday.
Why the rally?
C&I Leasing is enjoying a rally mainly fuelled by a string of seemingly impressive results and corporate actions. The company in its 2014 FY results post a 69% increase in earnings per share to 19kobo (2013 11kobo). The company followed that up with a proposed dividend per share of 8 kobo up 100% year on year. Earlier in May, it also reported a 120% increase in pre-tax profits to N335million and a 93% increase in earnings per share of 13 kobo. These pieces of corporate information have basically triggered this rally.
Is it justified?
For a penny stock, retail investors need to be circumspect whenever they decide to embark on a buy decision. C&I Leasing being one, makes us wonder if this current rally is justified. Using rudimentary valuation metrics such as the price earnings ratio indicates a cheap stock. At 69 kobo per share, the trailing P/E ratio for the company is under 4x suggesting an earnings yield of about 28%.
Using the proposed dividend of 8 kobo per share also suggest a dividend yield of 12%!! Very few stocks beat such numbers and could easily pass as a justification for the rally.
But one will be foolhardy not to consider other factors. For example, C&I has a price to book ratio of 0.23 which by most standards is an indication of how cheap it is. However, that may be deceptive as it indicates a larger problem. The company had a return on equity of 5.9% in 2014 and a return on asset of under 2%.
This suggest the company is doing a very bad job at sweating its assets. In plain terms, it simply means it is hugely under performing. Perhaps that explains why it had remained at 50 kobo for a long time. C&I Leasing traded at over N3 just five years ago. From a Gross Revenue of N14billion this company just makes over N300m. That is like N2 for every N100 in sales.
The business may just be on the verge of turning around as the recent string of results indicates, however operational headwinds persists and the risk that they incur significant impairment charges on some of their finance and operating leases persist.
Liquidity is also a factor to consider with this stock. The company has over 1.8billion shares but it trades just over 4 million as its 30 day average. Buying the stock now may present a problem should you want to sell it in future. Also with many hoping to buy for short term profits, miss-timing your entry and exit period may prove very costly in the short term.
C&I also has a deposit for shares of about to N2billion which represents US$10,000,000 unsecured variable coupon convertible notes issued by Aureos Africa LLC on 11 January 2010 for a period of five years. The company has elected to convert this to equity and could result in a significant dilution. The total sum of N2billion is even more than the company’s market cap of N1.3billion. On a flip side, there might also be an incentive to maintain a bullish share price as a way to reduce the impact of dilution. However, one doubts the company will convert these to shares any time soon, not with its share price still in the penny stock range.
Buy sell or hold?
Technical Analysis pundits would probably go for a buy in this instance. The dividend yield of 12% is attractive enough and the impressive Q1 results this year also provides an added level of comfort. However, the fundamentals of the company still leave a lot to be desired as we feel despite the results, it is still a poorly run company. This is not a company we want to rush into despite the bullish signals.
Buy, If dividend and short term capital gains is target
Hold, If long term as there are better stocks out there
Disclosure – Nairametrics and the author of this article does not owns shares in C&I Leasing Plc and does not plan to buy shares in C&I Leasing Plc in the next 48 hours. The author of this article wrote it themselves, and did not write this article on behalf of C&I Leasing Plc , its associates or representatives. The article is purely their opinion.