Etisalat UAE, the largest shareholder in Nigeria’s third largest GSM Network, Etisalat Nigeria, may have discretely agreed to pull out of Nigeria. This was mainly contained in an exclusive report by Premium Times, Bassey Udo on Monday June 19, 2017.
Etisalat has been embroiled in negotiations with a consortium of Nigerian lenders who it owes about $1.7 billion. The story suggest Mubadala has decided to exit Nigeria but are delaying an announcement to ensure a smooth transfer to a potential buyer. Here are the nuggets;
Etisalat UAE invested into Nigeria using the vehicle Emerging Market Telecommunications Services (EMTS). It owns 40% ordinary shares in EMTS and another 25% equity in Preference shares. Former Chairman of UBA, Hakeem Bello-Osagie owns the rest. Mubadala, the United Arab Emirates state owned investing firm, is an indirect investor in EMTS through its stake in Etisalat UAE. It was expected to bailout the Nigerian entity.
The story suggest, Etisalat UAE could be exiting Nigeria as its shareholder, Mubadala has decided not to bail out its Nigerian entity.
Why delay the announcements
- The optics are very key for any negotiations with a potential buyer for Etisalat UAE’s stake in EMTS. A such, announcing that it intends to leave in an acrimonious manner could deter investors and negatively impact on its valuation.
- Analysts also opine that Etisalat’s GSM license may be on the line if Etisalat UAE exits. The GSM license is thought to be issued to Etisalat UAE because they were also technical partners with Etisalat.
- For the Nigerian consortium of banks, it is also important to continue to manage Etisalat UAE considering that their preferred option would have been for the parent company to once again bailout its Nigerian subsidiary.
The way forward?
As negotiations continue, the parties are said to be considering a possible takeover by a foreign firm (an unnamed investment consortium in the UK has been mentioned). For Etisalat and the banks time seems to be running fast and we believe the following options are the like way forward for the company if it plans to avoid going bust.
|Options for Etisalat||Remarks||Downsides|
|Launch an IPO|
This involves a sell down of shares by existing shareholders to the general public. Etisalat is a well known brand in Nigeria and could attract investor sentiments in an already bullish market. The NSE has also been trying to get Telcos such as MTN to list in the exchange.
|This is probably a long term option for the company and its stakeholders. An IPO may take months to materialize and there are no guaranties that it will be fully subscribed.|
|Attract a private equity investor||This is probably the logical path towards getting out of this mess and we understand this is the option being pursued. It involves Etisalat selling to an investor or consortium of private equity investors.||However, this is no silver bullet as PE firms also take time to hammer out deals. Issues like valuations, regulatory approvals, exchange rate, legalities, indemnities etc. take time to sort out.|
|Mike Adenuga||The billionaire investor whose networth is said to be around $6 billion according to Forbes is thought to be interested in acquiring the company. Chairman as he is fondly called has deep pockets and could see this deal as an opportunity to kill off perhaps its closest competition.||Some senior executives of Etisalat have come out to deny this rumour. Whilst, the billionaire investor probably has the cash to buyout Etisalat, regulators (NCC & CBN) may not allow it to fly for obvious reasons. We also see a push back from top executives at Etisalat.|
|Debt to equity conversion||Nigerian Banks were offered an debt to equity swap by Etisalat but they rejected the offer vehemently.||The banks want their cash and nothing else. This is an unlikely cause of action in these negotiations and could only occur if the company is woundup.|
|Mubadala bailout||This option involves Etisalat's parent company, Mubadala once again coming to the rescue and bailing out its Nigerian subsidiary.||While this may be the best option on paper, as things stands this is infeasible as Mubadala is rumoured to have resigned to exit Nigeria. They have made it clear that they are not providing any more bailout funds|
|Nationalisation||This is perhaps the least preferred but likely action in the event that all fails. The CBN on behalf of the banks will have to bailout Etisalat, thus taking over the company by law. It could use a vehicle like AMCON to buy the loans from the banks and then seize ownership of the company forcing an exit of the current shareholders.||The government has shown apathy towards another bailout but this option remains on the table considering the thousands of jobs that could be lost and the critical role Etisalat plays in Nigeria's nascent telecom industry|
|Acquired by another foreign Telco||When the V-Mobile had similar funding issues it seek alliances from middle eastern telcos looking for an inroad into Nigeria's nascent GSM industry. it first got Zain as an investor who then divested to Airtel, an Indian owned GSM Company. Etisalat could also follow this option||Mubadala is one of the largest telco in the middle east so it will be unlikely that it could find a buyer from there. South Africans are also hesitant to commit more funds into Nigeria following the experiences of the likes of Tiger Brands and the MTN fine. Looking towards to west to the likes of T-Mobile, Verizon, Orange may be an option. Nigeria is Africa's largest GSM market with over 90 million internet hungry consumers.|
Note: An earlier version of this article has suggested Mubadala had direct interest in Etisalat Nigeria.
Buy what? Dangote vs BUA Cement
Dangote Cement has a market capitalization of N3.65 trillion, while BUA posts a N2.49 trillion capitalization, but does size win?
I want to review the performance of the largest quoted companies in Nigeria.
On the Nigerian Stock Exchange, they don’t come any bigger than Dangote Cement (Dangote) and BUA Cement (BUA). Only MTNN stands with both cement companies in terms of market capitalization. Dangote and BUA are both blue-chip companies, in the same sector and both enjoy federal import protection, they also both serve a local market with huge demand for cement.
Which is a better investment? Let us assume I have N100,000.00 (One Hundred Thousand Naira,) which should I buy? Let us review both stocks with FY 2020 results they posted. For consistency, I am going to use my trading view terminal numbers.
First, we talk about capitalization, (Market cap is the number of shares issued x market value of shares ). Dangote Cement has a market capitalization of N3.65 trillion, while BUA posts a N2.49 trillion capitalization. Does size win? Dangote is bigger? Not yet!
With N100,000 I can buy about 465 shares of Dangote at N215 a share and 1,360 shares of BUA at N73.50 per share. Is BUA cheaper? do we have a winner? Not quite. Let us dig deeper.
Dangote Cement posted a Net Income figure of N276 billion, if we divide this earning by the number of issued shares which is 17 billion, we get an Earnings Per Share (EPS) of N16.14, so every share of Dangote Cement earns (not pays) the investors N16. Similarly, the Earning Per Share of BUA is N2.0
Thus when I buy Dangote Cement N215 per share, I am buying 16 times the earnings of Dangote. We can simplify this by simply comparing the price I pay per share of Dangote to the EPS of Dangote (Price to Earnings Ratio), thus I invest my cash of N215 to buy 16 times the earnings of Dangote, thus the Price to Earnings Ratio of Dangote is 13.31 (P/E). Using the same calculation, the price for each earnings of BUA (the P.E.) is 35.38. This means even though I am paying more cash for each share of Dangote, I am paying less to buy the earnings of Dangote, thus Dangote is cheaper than BUA.
So our first milestone is reached, we have used the Net Income, Market Price, and Number of Issued shared to get the Earnings Per Share, we have then determined what amount of earnings we are buying to determine which stock is at a bargain.
Let us look at the earnings that will be paid in cash. Remember, Earnings, is just the Net Income of Dangote, we as equity holders have the opportunity to share in any portion of the Net Income.
Dangote in 2020 paid out from earnings N272.69 billion as dividends, this translates to about N16 per share or in terms of returns 7.44%. We get this Dividend Yield return by comparing the dividend paid to the market price per share (D/P). BUA also in 2020 paid out N59.26 billion as dividends from earnings, this translates to a dividend yield of 2.81%.
So, if I invested N100,000 in shares of Dangote Cement, I would earn a cash return of 7.44%, if I did the same with BUA I would earn a cash return of 2.81%.
Let us go a bit deeper…
When you buy a stock, you are buying into the earnings and cash flow. Dangote Cement in 2020 earned N276 billion and paid N272 billion as dividends meaning they retained about N3 billion for that FY while generating over N248b in Free Cash Flow. Similarly, BUA earned a net N71.52 billion, paid out N59 billion in dividends, retained N19 billion but posted a negative Free Cash Flow of (N95.49 billion). Should BUA cement have simply used that cash to finance working capital rather than paying it as dividends? Perhaps. Let us speak more of Cash flow.
Cash retained is cash not paid to you the investor. You have to ask how well your company is utilizing that cash retained. Should it all be paid out as dividends? Or retained in the company to fund expansion and growth?
Look at it this way, if Federal Government Bonds were offering a Yield of 15% and we see that Dangote is offering a yield of 7.44%, then as shareholders you should demand that Dangote pays more cash to you to allow you to invest in FGN bonds because you get a higher return (at lower risk). The point is any company retaining cash or paying cash at a lower yield than the market is hurting the investors, who are missing the opportunity of investing higher elsewhere.
Let us score both company managers by how well they have managed the revenues and capital of the companies
|Return on Assets %||Return on Equity %||Return on Invested Capital %||EBITA Margin %||Net Margin %||Debt to Assets||Long Term Debt to Assets|
Across the board, the management of Dangote Cement has done a better job when compared to BUA Cement in managing the assets of the company. Dangote Return on invested capital is higher with a much lower recourse to debt and of course a higher FCF number.
Overall, on Earning, Returns and Efficiency, it appears Dangote Cement posts better fundamentals…
Do follow @FinPlanKaluAja1
This is not investment advice, this is not a recommendation to buy or sell. Past performance is not a guarantee of future performance. Speak with your adviser before investing. Equity is risky.
Is something fishy going on at Custodian Plc?
Custodian stock hit a year high just as it announced a Convertible Loan Instrument set to be approved at its AGM.
Custodian Plc, one of the largest insurance companies in Nigeria is currently trading at a new year high of N7.10 and is up 21% year to date. Nairametrics Blurb team has in recent days noticed an upsurge in its share price especially since the company announced its AGM.
As we pen this article, about 2.9 million units have exchanged hand at a share price of N7.
The stock is included in the Pension Index and by some measure quite illiquid. It is also one of the stocks recommended in our Premium Service Stock Select Newsletter thus the need for further introspection.
Custodian Investment AGM
Typically, when companies announce AGMs we are keenly curious as this is where decisions that can ultimately affect shareholders (especially smaller retail investors) are approved.
In its recent filings, the company stated as follows in item 10.
That the Board of Directors of the Company be and is hereby authorised to:
(a) raise the Naira equivalent of up to $15,000,000.00 (Fifteen Million US Dollars), as additional capital through a convertible loan instrument;
(b) convert the loan in the Naira equivalent of up to $15,000,000.00 (Fifteen Million US Dollars) into shares in the Company (the “Conversion Shares”) at a conversion price, being the higher of N6 per share or the 12-month historical average daily share price of the Company derived from the Daily Official List of The Nigerian Stock Exchange (for the period ending on March 23, 2021), subject to adjustment upon the occurrence of certain adjustment events;
(c) allot the Converted Shares to the Lender upon the exercise by the Lender of its right to convert the Loan into shares in the Company, subject to applicable law; and
(d) take steps necessary or reasonably desirable to give effect to the foregoing resolutions and for effecting any transactions pursuant thereto, including the appointment of professional advisers, and the obtention of relevant regulatory approvals.
What this means?
In simple English, the directors of Custodian are seeking the approval of its shareholders to borrow $15 million (N6.1 billion) in convertible loan instrument.
A convertible loan instrument is simply a loan that you can convert into shares if the lender so wishes. The share price for conversion are predetermined and in this case, they stated N6 per share or the 12-month historical average daily share price of the company’s stock.
If the lender does decide to convert the loans to shares at the current share price of N6 per share, it means about 1 billion shares will be offered to the lender, an equivalent of 17.4% of the total outstanding shares of the company. This loan is in effect, a potential dilution of existing shareholders of the company if it is approved at the AGM.
So why is the company seeking a convertible loan or even diluting its shareholders?
Fishing around for why
Typically when a company decides to raise money via a convertible loan instrument, they are looking for lower interest rates, debt that avoids the burden of periodic repayment, and/or looking to delay when the actual equity is issued. There are also tax considerations at play but not as significant as the ones mentioned above.
Except, Custodian is looking to purchase another asset, after it bought UPDC, we do not understand why it will be looking to raise capital huge enough to dilute existing shareholders. It also did not explain why it is seeking to raise the said capital in its AGM Notice, a slight departure from the norm in cases like this.
- Custodian is also highly capitalized with a Net Asset of about N46 billion and a balance sheet size of N176.1 billion (after the acquisition of UPDC) as of 2020.
- Suffice to add that the company recently paid shareholders about N2.6 billion in dividends, making us wonder why it is seeking to dilute shareholders when it could have just ploughed that amount to its capital raising needs.
- In fact, the dividends paid in 2020 was just 21% of profits, meaning it had retained about N10 billion in profits made during the year. Again, why does it need N6.1 billion in loans?
- Custodian also has a thriving insurance business which fetched it about N58 billion in gross premium income out of which N32 billion was from non-life. Again, why does it need N6.1 billion on convertible loans?
- The company currently carries a debt of about N5.5 billion which was inherited from its acquisition of UPDC. The debt is mostly a bond issued at an interest rate of 16% per annum and due for full liquidation in 2023.
- There is no rush to pay down this debt.
We are lost as to why the company is looking to raise this capital and can only now think of two reasons. Firstly, could it be the existing shareholders looking to tighten their stake in the company? Custodian’s majority shareholders are Gratitude Capital Limited and Mikeade Investments Limited with 22.48% and 15.72% respectively.
- The company CEO Oluwole Oshin represents Gratitude Capital while Business Mogul Micheal Ade (Elizade) owns Mikeade Investments Limited. Could it be either of these two investors looking to up their stakes?
- There could also be a reason for this back door approach. About 74.5% of the company is owned by just 20 shareholders so it is clear that increasing majority stake will be difficult to achieve.
- The other reason is perhaps an institutional investor looking to acquire a significant stake in the company through the backdoor. Is this plausible?
Well, these are speculations that only Cusdotian can confirm. We hope they do so as soon as possible.
Nairametrics | Company Earnings
Access our Live Feed portal for the latest company earnings as they drop.
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