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Bottom Line: C&I Leasing is in bed with debt

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Photo by Ahmed Ashhaadh on Unsplash

C&I Leasing: Whenever a company reports profits backed by strong operating cash flows it excites my senses. In a world where profits and cash mean two different things, you will be foolhardy to rejoice whenever a company declares profits without backing it with some cash.

In its recently declared 2017 results, C&I Leasing did just that. The company reported a 19% rise in profits to about N1 billion. Operating cash flows after paying suppliers, salaries and other expenses was a healthy N9.9 billion cash. The company went to work with the money and spent N7.7 billion on operating lease assets. On Marine Equipment it splurged N5.9 billion and on cars and trucks another N1.8 billion. By the time it was done spending, it had about N2.1 billion left to spend on other things such as debts and maybe dividends.

But C&I Leasing ended the year with just N119 million out of which was N72 million, the opening cash balance at the beginning of the year. From the N2.1 billion left after spending on new assets, C&I Leasing generated just N17.8 million in extra cash. Dig a little bit further up the results and it’s easy to see what had happened. The company is basically in bed with debt.

The company has a Balance Sheet size of N45 billion out of which N35 billion made up of all kinds of debt. The interesting thing about its debt profile is not just that it is 3.5x its equity it is the number of people that the company is owing. C&I owes just about every category of debtors from banks, bondholders, tax authorities, suppliers and even retirees. It’s a long list that can make any perennial borrower proud. Who are these creditors you may wonder? So I’ll give you a little run down.

For banks it has owed, Access Bank, Diamond Bank, Citi Bank, FCMB, GT Bank, Fidelity Bank, First Bank, UBA, Zenith Bank, Standard Chartered Bank, FSDH Merchant Bank, Absa Bank, Lotus Capital, Stanbic IBTC and Intercontinental Bank – Cedi. That is about 15 banks by my count.

It also owes another N9.6 billion to “Individual Clients” and “Institutional Clients” as at 2017. In fact, its individual clients are owed about N6.9 billion. Loans from Institutional Clients include those from Bank of Industry, B.V. Scheepswerf Damen Gorinchem, a Netherlands Based lender. How a company deals with this multitude of lenders is stuff made for MBA Classes and their case studies. I have been analyzing company financials for about 10 years now, but I have not seen anything like this before. Even the folks at Oando should be proud of this.

It is interesting to note that despite these complex web of lenders, C&I Leasing has somehow managed to meet its debt obligation. It does this by outright paying off the debts when they are due or kicking the can down the road as its typical with Nigerian businesses. Rather than register a default, they negotiate with their banks and roll over the debts by restructuring with new terms and tenor. This creates a win-win situation where the bank avoids to book a loan loss provision, earns some new fees and the company in return gets a breather on its cash flows. In all this, someone suffers, and that person is you the shareholder.

Apart from the paltry dividends, it pays to its shareholders, its share price was before now nothing to write home about. Between 2015 and 2017 it traded flat at 50 kobo before it more than doubled to N1.9 between 2017 and as at this week. The rally, which is typical of Nigerian stocks probably has little to do with its fundamentals.

In fact, a dilution of its shares is very plausible considering that it has about N2.2 billion in deposit for shares which if it converts can amount to about 1.2 billion units. The deposit for shares is a $12.48 million coupon convertible notes which it received from Aureous LLC Africa (yet another creditor).

If this crystallizes, (of which it will because C&I has agreed to convert it) the shareholders could give up 43% of shareholdings to Aureos LLC Africa, the holders of the coupon convertible notes. Some analysts believe this perhaps explains the recent rise in its share price as these dynamics typical paves the way for a new round of equity raise.

Bottom Line

C&I Leasing is an example of truly Nigerian dream and one should give the Vice Chairman Emeka Ndu credit for founding this company and keeping it alive since 1991. His profile perhaps explains the dexterity to which it has been in bed with debt over the years. However, it is time it reduces its reliance on debt in exchange for patient capital. There is increased competition in this space and some of the newer leasing companies are not quoted, have patient capital, scaling gradually, nimble and aggressive at chasing new and existing businesses. C&I leasing has the experience, brand name, and economies of scale to still muscle them out. Unfortunately, these all amount to nothing, if it cannot shake off its weakness….its flirtation with debt.

 

 

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Ugo Obi-chukwu "Ugodre" is a chartered accountant with over 16 years experience in financial management, corporate finance and financial analysis. He is also a retail investor and a personal finance advocate with over a decade experience investing in the Nigerian stock market.Ugo is the founder/Publisher of Nairametrics and blogs regularly on the website.

9 Comments

9 Comments

  1. Anonymous

    March 28, 2018 at 4:52 pm

    I completely agree with this analysis. Add to this the weak earning power the company has, the extremely thin margins it has to deal with and the below average returns on equity and you’ll understand why one ought to run from this enterprise for now.

    Good job sir.

  2. Anietie James Okuku

    March 28, 2018 at 5:02 pm

    Brilliant analysis sir. Now to all you have said, add [a] very weak earning power in relation to enterprise value, [b] razor thin net margins and [c] below par returns on equity. These are reasons that have been making me flee from this company for years now.

    Good job sir.

  3. Nene

    March 29, 2018 at 9:10 am

    Hi Ugo, Please do you do trainings on shareholding and finance investment etc?

    • Anietie James Okuku

      March 29, 2018 at 5:07 pm

      Hello, Nene. I know your question is directed at Ugo. But i guess it’s know harm to state here that i do trainings.

  4. Pimpim Pirosky

    March 29, 2018 at 11:40 am

    The good news is that the company is still afloat, doing great and perfectly managing its business and debts. Enriched with excellent and top master managers, our money is surely in safe hands. In the business world, who can do business with debts. C&I Leasing is an indigenous company that should be highly praised for doing excellently well even with the harsh Nigeria business environment.

    • Pimpim Pirosky

      March 29, 2018 at 11:42 am

      In the business world, who can do business without debts

  5. John T Ojo

    April 6, 2018 at 8:20 am

    I think that Ugo doesn’t quite get the business of the company. They are a growing and significant service provider to companies like Shell, NLNG, Chevron, PZ, Huawei and Exxon Mobil. They own 17% of the local subsidiary of BW Offshore, the 2nd largest FPSO operator in the world.

    As an oil and gas player, I am impressed enough with the gains and progress they have made in transforming the business. O yes, they are debt heavy but who wouldn’t be if you grow your balance sheet from N17b to N45b? The challenge for the company will be to find patient capital in this IPO-challenged market.

    On the whole, I will vote with the company and buy more shares. They have made steady progress over the last 5 years in exiting unprofitable businesses like car distribution and even retail leases.

  6. Olumide Foyekun

    April 16, 2018 at 9:30 am

    I have read the annual reports for the last few years and it does appear that C&I have put a lot of history behind it. If you look at all the losses that they have written off over the last few years up till 2016. This probably explains the spike in their profitability in 2017.

    I think that deeper analysis will confirm my findings.

  7. Layi

    May 25, 2018 at 4:13 pm

    @Ugo, wouldn’t it have been better if you do an analysis of Lagos State and Nigeria budget financing and understand the term ‘leveraging’ before you start doing your amateur analysis. Do you even understand the type if business C&I Leasing does? The are into leasing and a bulk of their obligations are in the form of operating lease backed by corresponding assets on the other side of the b/sheet. Did you consider their receivables of over N10billion before you consider their CP? Men, you need to learn this fundamental techniques from the gurus before misleading the public. Anyway, you’re a blogger and only concerned about website traffic and not objective analysis.

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Blurb

How does a bank make N19 billion a month?

The strategy for banks globally is to attract deposits at a lower rate than it lends out to borrowers.

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How does a Financial Services Group make N19b a month, post a Profit After Tax figure of N230b in an environment where global commerce virtually ground to a halt in 2020?

The Zenith Bank Plc (Zenith) Year-end 2020 final results are a blockbuster, not just in the quantitative, but the qualitative as well. In all major headline numbers, Zenith posted growth on a Year-on-Year basis, specifically, Gross Earnings are up 5.2%, Net Interest Income up 12%, Customer deposits up 15.3%.

Somehow Zenith grew her loan book by 18% in a recession and reduced the volume of Non-Performing Loans in the same period. Zenith was also able to post a higher revenue number from non-interest income even as yields on fixed-income fell across Nigeria. I must stress, Zenith has posted these results by servicing her target segment of the high-end corporates in Nigeria.

READ: Union Bank Nigeria Plc posts N15.9 billion profit in 9M 2020, up by 2%

So how did Zenith achieve this? I want to do a deep dive into how to make profits in a recession. However, it is important to start with a background on how banks make money which is basically in two ways;

  • Interest income: which is income generated from the bank gathering deposits from customers and investors and “renting” out these funds to individuals and corporates for a fee called interest. Interest Income is seen as the main business of banks. It is a measure of how well the bank has fine-tuned its people, process, and systems to generate returns from a commodity called cash.
  • Non-Interest Income: This is the income the bank generates from deploying its brands and people to juice revenues from activities that do not necessitate a transfer of cash. For Example, a bank asset management business leverages the bank’s skillsets to earn fees by providing investment advice to clients. Does a business want to expand? The bank can advise on the process to make that happen.

READ: Zenith Bank spends N20 billion on IT in 2020, up 122%

The strategy for banks globally is to attract deposits at a lower rate than it lends out to borrowers. This allows the bank generate a spread between cost and revenue. The bank’s interest spread can be magnified by the number of quality loans it creates as Interest Income rests also on the quality of the loan book. Positive spread drives the funding of other banking services and is supported by the banks internal competencies to manage risk

So a bank makes profits by

  1. Attracting cheap deposits
  2. Earning positive spread
  3. Providing value addition for a fee
  4. Effective Risk Management

All these have to happen simultaneously. A bank that sources expensive deposits by paying higher rates generates a lower spread. Lower spread exposes the bank to cost overruns and will prove fatal to long-term growth.

READ: Zenith USSD banking transaction value rises by 30.8% Y-o-Y to hit N497.29 billion

With this in mind, let’s review Zenith FY 2020 Performance

  • Attracting Cheap Deposits: In 2019, Zenith’s total interest expense, which represents how much it paid to get deposits was N148b, that figure dropped in 2020 to N121b. this means the bank was able to grow deposits by 25% but at a lower cost. How? Zenith changed her deposit mix, reducing borrowed funds/leases and time deposits by 41% and 38% respectfully and increasing the share of current accounts by 155%. By swapping the deposit mix, the bank’s cost of funds ratio fell by 18mn%.
  • Earning Higher Spread: Zenith grew Net Interest Income by 12.2% in 2020. This figure represents income earned from the deposits and investments of the banking group. Again, this was achieved by asset mix reorganization. In the face of falling rates especially on shorter-dated FGN instruments, Zenith shifted allocation from Treasury bills to longer-dated FGN bonds which paid a higher yield. Zenith’s Non-interest Income also grew to N275b a 5% jump from 2019. This is driven largely by extraordinary items including foreign currency revaluation gain, which is the gain realized from the revaluation of foreign currency-denominated assets. I must highlight this. Zenith was able to post a gain of about N43b which is a 256% gain from FY 2019 based on the Naira being devalued to the US Dollar.
  • Providing Value Addition: Value addition will include all non-core banking services Zenith Group provides to the public including subsidiaries like the Zenith Penson Custodians which has N4t in assets under custody. Commission on agency and collection was a big contributor to Zenith’s non-core banking revenue.
  • Risk Management: Zenith was efficient in deploying its internal competencies to minimize and avoid risk and impairments from the ordinary and extraordinary course of business. Zenith like other financial institutions saw a pullback in commercial activities from her clients. Take the Commerce subsector, the Non-Performing Loan share in that sector grew from 9% to 24%. Zenith, booked an increase in the number of NPLs by volume to N125m in FY 2020 but the bank was able to keep the NPL ratio down to 4.29%. An extraordinary feat.

Overall, the bank was able to navigate a difficult year and post a good return and a handsome dividend of N3 to investors. Zenith was able to achieve all this while increasing the staff strength by 4.6% to 7555 employees.

However, there are red flags as well:

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  • Net Interest Margin was down in FY 2020 as yields declined. If yield continues to stay muted, can Zenith keep finding profitable avenues to invest that N5.34 deposit base?
  • Interest income positive in FY 2020 at 420b but when compared to 2017, interest income is falling.
  • If you ignore the revaluation gain, then Non-Interest income will be considerably muted, possibly negative in FY 2020
  • Fees on electronic products fell 36% in an environment where online banking has been not just sound business practice, but life-saving as well.

Overall, in an environment with months of local and international shutdowns, Zenith has posted good numbers and demonstrated it is possible to eke out gains from a hard environment. When one looks at the dividend yield, P.E. Ratio of the bank, for me, this is a Buy.

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Why there is a massive sell-off of US stocks

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Nigerian stocks record worst quarterly drop since 2009

The United States 10-year Treasury yields rose to a new one-year high of  1.5% on Thursday sending the equities market on a bearish run. The US Dow Jones Industrial Average was down 1.5% as of 7.30 pm on Thursday falling by a whopping 500 points. The S&P 500 and NASDAQ were both down 2% and 2.75% respectively ad the sell-offs intensified.

Global bond prices also fell lower on Thursday and investors around the world sold off massively as they feared higher inflation could erode bond yields.

What is going on?

Investors are worried that massive injection of stimulus in the US and in most European countries could trigger higher inflation which will erode profits on bond yields assuming their fears materializes.

US inflation rate for the month of January 2021 was 1.4% the same as the month of December 2020. US inflation was as high as 2.3% a year ago yet investors remain worried. In response to this fear, bond yields have hit multiple one-year highs. This fear is has now spread to the US equities market.

US President Joe Biden is seeking a $1.9 trillion stimulus package which many had hoped will please the market. However, it appears investors are rather afraid that it could trigger a “reflation” eroding whatever positive jolt it could have had on the wider economy.

What this means for your stocks

A rise in interest rates is triggering a massive sell-off in US stocks ad investors fear a return to higher inflation could signal the market could be entering a bearish era. Stocks have hit multi-year highs since January as investors poured in billions of dollars into stocks. If this sell-off persists then investors in US stocks could see the value of their portfolio plummet.

Tech Stocks are particularly affected by the sell-offs with investors dumping heavyweights like Netflix, Tesla, Amazon, Microsoft, Facebook, Google all falling. Meme stocks, an acronym for stocks popular with Reddit and Twitter retail investors have also suffered losses.

Nairametrics SSN  subscribers are advised to track their portfolios accordingly.

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