[ANALYSIS] Is Etranzact a Bull Trap or a Buying Opportunity ?

ETranzact topped the gainers chart last week with a 13% pop as investors sent the bulls the way of mobile money company. Investors looking to ride the bulls galloping on the company’s road may be wondering if this is a yet another bull trap or if it is really a buying opportunity.

Fundamentals

E-Tranzact is undergoing something of a transformation in the last couple years which has seen it reverse its negative retained earnings into profits that it can distribute as dividends. The company did actually declare its first ever dividends this year (2014 results) of 5 kobo per share. The company in its 2014 annual report posted a revenue of N7.1 billion representing a year on year growth of 51%. In fact, the company has grown its revenue by a compounded annual growth rate of 68% growing from about N900m in 2010 t0 N7.1billion this year. Profits have also grown from a loss of N138 million in 2010 to about N408 million this year. Profits have now grown by double digits since 2011.

The Chairman in its annual report confirms its partnerships with banks, international fund transfer companies have been critical to its recent success. The company also has no debt and generated an operating cash flow of over N1 billion in 2014. The company mostly makes money from ‘mobile purchases of airtime’ (selling airtime), service and transaction fees on mobile devices, sale of P.O.S devices etc. The company in 2014 made about N4.9billion from mobile purchase” about 70% of its revenues. However, margins from there are rather small with about 91% going to cost of sales. Most of its profits however comes from commissions with over N984m earned in 2014 out of N1.72billion or about 64% of Gross Profits.

E-Tranzact already posted N328m in profits in the first half of this year representing a 100% growth year on year. Operating cash flows was N171.7 million with about N2billion cash in the bank. It also has a positive working capital in excess of about N1.9billion. The fundamentals by all accounts look impressive, however its small retained earnings, set to grow to about N800m this year hampers dividend growth.

Expenses

E-Tranzact spends about 73% of its gross profits on operating expenses (N1.14billion) , a remarkably high number. In fact in 2014 it spent about N149million on director fees and expenses much more than what it spent on sales and marketing expenses. The company only has 6 directors. At 5kobo per share dividend, E-Tranzact dividend of N210million is only just N61million more than what it pays its directors. It is important to note that the Chairman earned just N2m this year whilst the highest paid director earned N76million. The company has just two Executive Directors including its CEO Mr Valentine Obi.

Share Price

At a current price of N2.75 the share price is trading at a multiple of 19x. It’s current growth levels suggest the multiple is perhaps justified, however the industry is very competitive and subject to disruption. We do not expect revenues to continue to grow at this rate in the near future. The current dividend of N5kobo per share is also not expected to grow significantly ensuring the dividend yield of 2% will remain unattractive to long-term investors.

Short-term investors looking at the share price technicals and historicals may believe that the traction it is currently gaining will taper. The trend we see now may well be driven by sentiments and market making than it is by fundamentals. The company has no debt so we see no incentives to raise capital. We also do not envisage any impeding equity sale even though its majority shareholder Mr Tony Egbuna may well wish to sell down its holding which is put at 50% of the company.

Bull Trap?

Investors may also remember that the company share price once hit N3.60 just as recently as August and may be on its way back there or simply just reverse to mean a characteristic of bull traps. It hit N5.47 in December 2012. It hit N3.6 back in August only for it to drop to N2 in September. Its current bullish journey in our view isn’t buttressed by fundamentals exposing it to bearish attacks that could happen once sentiments change.

Bonus?

E-Tranzact fundamentals look good like we analysed above however retained earnings remain a concern. The company has huge cash pile of N2billion and by now should be looking to return some of that cash to shareholders. But with a retained earnings projected to hit N800m this year, dividend growth will still mean poor dividend yield at this price.  Even if it doubles dividend to 10 kobo this year, dividend yield will only rise to 4% based on the current share price. A bonus issue may well change the equation. However, its share premium of just N646.8 million is small in comparison to its issued share capital of N2.1billion. Nevertheless a 1 for 5 bonus issue may not be far fetched.

Buy sell or hold?

The company share price in our view has a fair value estimate of between not more than N2. Any price above that is considered premium and above our margin of safey. The share price from our records has not traded below N2 in the last 5 years.