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.