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Blurb

Time is running out for Courteville’s business model

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On Monday, April 16th, 2018, the share price of Courteville Business Solutions Plc reached its lowest level in five years, closing at ₦0.20 against outstanding shares of 3.55 billion. With this, the company’s market capitalisation stood at ₦710,000,000, indicating a very low level of investor confidence, among other things. This raises the question as to whether or not Courteville has been profitable over the years. To answer this question, we did some digging into the company’s financial records for the past five years. But before we let you in on what we found out, get to know a bit about what the company does.

An insight into Courteville

Courteville Business Solutions Plc was incorporated in 2005 as a limited liability company. It is an e-business solutions and advisory firm with a vision “to be a trusted partner to employees and curator of an excellent working environment.” Being one of the foremost ICT companies in Nigeria availed the company of endless opportunities. Its growth potentials were immense, because not only was the company selling important business solutions that many Nigerian establishments needed to fast-track their operations, they were the first company to do that.

It can be said that to a great extent, the company initially took advantage of the opportunities available to it. This is best reflected in the company’s initial steady growth rate and the fact that it was the first Nigerian ICT company to become listed on the Nigerian Stock Exchange, with more than US$20 million raised from shareholders.

What could be responsible for Courteville’s declining profits?

Courteville makes money from commissions on the usage of its Motor Vehicle Administration Documentation solution and revenue from its e-commerce platform, Egole and WebPeople, a web hosting platform. However, revenue has stagnated over the years at just over ₦1.1 billion per annum.  Out of the ₦1.1 billion in sales the company made in 2017, ₦670 million was incurred on the cost of sales, thereby leaving a gross margin of about 40%. However, its rising operating cost of about ₦606 million slices off over 90% of Gross Margins leaving shareholders with nothing to share. Over the years, a slow decline in revenue has been unevenly matched with a galloping increase in operating costs. While revenue has gone from ₦1.2 billion in 2013 to ₦1.1 billion in 2018, profits have reduced from ₦307.8 million to ₦36.9 million within the same period.

While Courteville and its shareholders continue to wait in vain for dividend returns, which have not been paid since 2013, the board and management of the company continue to sustain themselves with salaries, allowances and other benefits that they can accrue. There appears to be no impetus to force a change of the company’s operating model as it continues to decline in profitability year after year.

On Courteville’s declining market valuation

In 2016 when Courteville’s Group General Manager, Adebola Akindele, was asked about his company’s rather abysmal performance at the Nigerian Stock Exchange, he dismissed it as a general problem affecting the system. According to him, it was “nothing untoward, nothing different from what the economy has shown, nothing outside what has bedeviled the Exchange in the past two, three years. I have always maintained the fact that the Nigerian bourse is one, I don’t know of many more. It’s one that does not really react to information, other than the fact there would always be profit-takers around. The lack of response to any relevant information stimulus bedevils almost every stock that I know. Outside Forte Oil, how many stocks have recovered to the level of 2008, 2009 and 2010? None, even the best performing stock or the highest buy price stock has been Guaranty Trust Bank Plc and it’s still hovering around at ₦20 or thereabout, Zenith Bank Plc has refused to just cross that path. It’s not because the results are not good, I’m sure you know that they have been declaring huge profits and paying humongous dividends; showing all the reasons people should take almost permanent positions in them.”

The above statement is nothing short of an excuse. Agreed, many companies have been affected by the unfavourable business conditions prevalent in Nigeria. Yet, many of these businesses have also recovered from the challenges and recorded impressive growth. That said, Courteville should consider innovating new solutions and targeting more market opportunities. It should also device better marketing means for its current services and perhaps consider cutting down on its operational costs.

 Courteville's share price

Chart showing Courteville’s share price over the past five years. Notice the steady decline…
Credit: Financial Times

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Governance Issues

In its 2018 accounts, its auditors, Thompson Aiyegunle & Co, cited that the “audit evidence we have obtained is not sufficient and appropriate to provide a basis for our opinion.” The auditors also pointed to a pending allegation of Corporate Governance violations against the Directors of the company with Security and Exchange Commission (SEC). It explained that “the management has not fully complied with the directives of the Security and Exchange Commission (SEC).” It also called out related party transactions between Courteville, Forster State Limited and Synergy Capital & Advisory Ltd revealing that “the transactions need to be reviewed in line with minutes of the Board meeting held on 24th October 2017.

Courteville’s growth potentials still abound

As an e-business solutions and advisory company, Courteville’s clients cut across different sectors. Its solutions serve those in finance, education, commerce, public administration, etc. Some of their most popular solutions are- AutoReg MVAD, RPRM, SMELite, P-SEAMS, REPAS, CIID, and Egole, etc. These are marketable solutions which are sure to guaranty at least ₦1billion in annual revenues continually for the company.

For instance, AutoReg which is a mobile data capture solution that enables field officers to remotely capture information about anything, including land, property, and humans. It is also used for the registration, licensing, inspection/test, insurance, and issuance of roadworthiness certification for vehicles. The software is currently adopted by many states in the country.

Similarly, RPRM is a monitoring solution which serves those in the public administration sector. It is specifically used for the monitoring of controlled items such as drugs. Government agencies, specifically the National Agency for Food and Drug Administration and Control (NAFDAC) use it.  They also have other important solutions such as P-SEAMS which helps parents monitor the activities of their children on the internet. Egole is an online shopping mall where different traders and buyers meet up and transact.

All these services aside, the company also offers website development and maintenance services to their wide range of customers. Note that web development and maintenance is a huge market currently in the country as many small and big businesses need the online visibility that websites provide and are willing to pay big for it. With these in mind, it is easy to see the various potentials that are still available to the company.

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It is, however, puzzling to see how they do not seem to be taking advantage of these opportunities.  Perhaps this could be due to two main reasons. Courteville’s Motor Vehicle Administration Documentation (MVAD) solution relies mostly on State Governments to generate its revenues. Motor Vehicle registration has declined over the last 3 years due to harsh economic conditions condemning the company to the flat revenue growth that it has experienced of recent.

To increase its revenue profits, the company will have to better innovate and provide solutions for a mass market rather than rely solely on vehicle registration as a source of revenue. Its e-commerce segment is a relatively small business when compared to the likes of Jumia and Konga, and it is nowhere close to creating the sort of value which shareholders need. Courteville should also be pioneering in the blockchain space, a recent technology that is yet to be harnessed locally.

Verdict

For Courteville, something has to give way this year. If it continues on this trajectory, then it is likely going to end up with the infamous tag of hitting the 1kobo price floor for the first time ever.

The company currently trades at 22 kobo per share and has lost a whopping 56% in value year to date. Despite this, it’s price-earnings ratio is 22x, suggesting that it is expensive even at this price. At a 5x earnings multiple, the share price could drop to 5 kobo per share.

At just over ₦781m in market Cap the company is trading for 22% of its book value and could even be worse if things don’t change.

Courteville Group Managing Director

Adebola Akindele, Courteville’s Group Managing Director

Emmanuel is a professional writer and business journalist, with interests covering Banking & Finance, Mergers and Acquisitions, Corporate Profiles, Brand Communication, Fintech, and MSMEs.He initially joined Nairametrics as an all-round Business Analyst, but later began focusing on and covering the financial services sector. He has also held various leadership roles, including Senior Editor, QAQC Lead, and Deputy Managing Editor.Emmanuel holds an M.Sc in International Relations from the University of Ibadan, graduating with Distinction. He also graduated with a Second Class Honours (Upper Division) from the Department of Philosophy & Logic, University of Ibadan.If you have a scoop for him, you may contact him via his email- [email protected] You may also contact him through various social media platforms, preferably LinkedIn and Twitter.

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Blurb

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?

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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.

READ: Dangote Cement joins MTN in the trillion-naira club, as 2020 revenue surpassed N1 trillion

Market Capitalization

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!

Market Price

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

READ: BUA Cement loses N162 billion in market value in a week

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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.

READ: Oba Otudeko’s stakes in Firstbank and Honeywell are worth over N10 billion

What else?

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%.

Stanbic 728 x 90

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%.

READ: Jumia: In search of the elusive break-even sales

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?

READ: Three things Nigerians can learn from Warren Buffet’s latest letter

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 AssetsLong Term Debt to Assets
Dangote Cement14.6231.2126.9244.0424.310.240.08
BUA Cement11.1519.1215.3541.8732.030.360.23
FY 2020

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…

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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.

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Blurb

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.

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Custodian Investment Plc. announces board meeting and closed period, Custodian Investment Plc. announces board meeting and closed period

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.

READ: Buy what? GTBank vs Zenith Bank

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;

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(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.

READ: Notore Chemicals is swimming in debts – company to access equity market in Q2 2021

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.

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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?

READ: Gains on quoted investment stocks rescued Custodian Investment Plc from loss in Q3 2020

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.

READ: NPF Microfinance vs C&I Leasing: A tale of two rights offer

What then?

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?

READ: Investors react to Fidelity’s bond listing, as it gains N1.74 billion

Well, these are speculations that only Cusdotian can confirm. We hope they do so as soon as possible.

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