The latest Quarterly review of the Nigeria Extractive Industries Transparency Initiative (NEITI) indicated that a total sum of N4.545 trillion was disbursed as FAAC allocation to the three tiers of Government between January and September 2017.
NEITI Director of Communication, Dr Orji Ogbonnaya Orji while briefing the press, stated that N1.757 trillion was shared in the 3rd Quarter of 2017. The first and second Quarter figures was put at N1.411 trillion and N1.377 trillion respectively.
How it was shared
As usual, the FG received a large chunk of the allocation of N1.851.32 trillion, followed by the 36 states and 774 local government areas that received N1.509 trillion and N913.8 billion respectively. Giving a further breakdown of the allocation, Dr Ogbonnaya mentioned that the DPR, Custom services and the FIRS received N271.78 billion as cost of revenue allocation.
There was a significant drop of 42% of allocation to the states in the first three Quarter of 2017 due to a drop in total revenue. As a result of this sharp drop, the NEITI Director encouraged states to focus more on raising internally generated revenue (IGR) rather than depending wholly on monthly allocation from the Federal Government(FG). Failure to do this may impact negatively on budget implementation at the state level. Unfortunately though, most states have now resorted to borrowing to fill the deficit as a result of the shortfall.
Trends in FAAC Allocation
A negative trend mentioned by the NEITI Director was the fact that FAAC allocation to 15 states in Nigeria had a ratio of budgets lower than 20%. Following the usual pattern over the years, it was observed that revenue allotted to states and LGs were higher in the 3rd Quarter of 2017. The review showed an increase of 37.02% allocation from 2nd Quarter to 3rd Quarter. At the state and local government level, the percentage increase from 2nd to 3rd Quarter was 25.57% and 29.80% respectively.
The positive development in the oil sector which is the main stay of the nation’s economy was responsible for the increase in FAAC disbursements to the Federal, state and local governments. Giving reason for the usual rise in the 3rd Quarter, Dr Ogbonnaya stated that the global oil demand and subsequent increase in oil prices was responsible.
The NEITI Quarterly review is a derivative of data collected by FAAC, National Bureau of Statistics (NBS), Federal ministry of finance and the Budget office of the Federation. A positive indication as shown by the upward trend in revenue allocation to the three tiers of government are sure signs of a healthy economy which if sustained can accelerate the movement of the country from recession.
Highlighting a major trend in the report as par sharp disparity in FAAC disbursement between January and September 2017, Dr Ogbonnaya mentioned a difference of 75% and 58% between the Federal and Local government allocation in the month under review. State governments on the other hand got the lion share of allocations in September as indicated by a difference in revenue of 53% between the high and low revenue months.
As a result of the fluctuation in revenue allocation to the three tiers of government, economic planning has been virtually impossible, as the funds to implement fiscal projects at all levels of government may not be available. The solution therefore lies in diversification of revenue sources to mitigate economic instability and ensure a steady income stream.
Further highlight from the NEITI report showed that the 1st half of 2017 witnessed a drop of 49% between budgeted figures and actual revenue. N5.368 trillion was projected by the FG while only N2.712 trillion actually accrued as revenue in the first six months. Luckily, the disparity between projected and actual revenue for non oil sector in the half year wasn’t much as 2.667 trillion was projected and 2.701 trillion came as revenue.
On the flip side of the review, there was a shortfall in actual revenue for the first half of the year. Actual oil revenue was N1.587 trillion. This figure indicated a shortfall of N1.079 trillion. The significance of this shortfall was that underperformance was 40.4%. Non oil revenue on the other hand did not fare better as underperformance was 41.6%.
The huge gap between oil and non oil sector projected revenue was highlighted in the report. As always, oil sector performed better than its non oil sector counterpart by a whopping 41%. N1.587 trillion was realized from the oil sector while just N1.125 trillion came through the non oil sector. Predictably, the report showed no changes in the three tiers of government in terms of actual revenue and projected.
Not all bad
A comparative analysis of government earning in 2016 to 2017 showed that total accrued revenue in 2017 was higher in the first half of compared to same period covered in 2016 by 22%. The report also indicated all sources of oil revenues except rent, recorded a positive upswing in 2017 compared to 2016 first halves. The same trend was observed in the non oil sector revenues as Value Added Tax (VAT) was highest contribution with an impressive 16% increase over 2016 figures.
These positive developments were attributed to Federal government’s aggressive drive in revenue collection and rapid expansion in tax base of the FIRS. On a rather negative note, the report didn’t mention any revenue recorded from solid minerals and no dividend was declared from investments funded by FAAC.
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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