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.
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.
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.
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.
Why Insurance firms are selling off their PFAs
It has not been uncommon over the years to have insurance companies with pension subsidiaries.
The idea of mitigating risks and curtailing losses at the bare minimum begins from the insurance industry and only crosses into the pension space with the need for retirement planning. For this reason, it has not been uncommon over the years to have insurance companies with pension subsidiaries. However, controlling the wealth of people is no easy feat – and crossover companies are beginning to think it might not be worth it competing with the big guns; that is, the pension fund administrators (PFAs) that already cater to the majority of Nigerians.
A few months ago, AXA Mansard Insurance Plc announced that its shareholders have approved the company’s plan to sell its pension management subsidiary, AXA Mansard Pensions Ltd, as well as a few undisclosed real estate investments. It did not provide any reason for the divestment. More recently, AIICO Insurance Plc also let go of majority ownership in its pension arm, AIICO Pension Managers Ltd. FCMB Pensions Ltd announced its plans to acquire 70% stakes in the pension company, while also acquiring an additional 26% stake held by other shareholders, ultimately bringing the proposed acquisition to a 96% stake in AIICO Pension. The reason for the sell-off by AIICO does not also appear to be attributed to poor performance as the group’s profit in 2019 had soared by 88% driven by growth across all lines of business within the group.
So why are they selling them off?
Pension Fund Administration is, no doubt, a competitive landscape. Asides the wealth of the over N10 trillion industry, there is also the overarching advantage that pension contributors do not change PFAs regularly. Therefore, making it hard to compete against the big names and industry leaders that have been in the game for decades – the kinds of Stanbic IBTC, ARM, Premium Pension, Sigma, and FCMB. Of course, the fact that PFAs also make their money through fees means the bigger the size, the more money you make. With pressure to capitalize mounting, insurance firms will most likely spin off as they just don’t have the right focus, skills, and talents to compete.
The recent occurrence of PENCOM giving contributors the opportunity to switch from one PFA to another might have seemed like the perfect opportunity for the smaller pension companies to increase their market shares by offering better returns. More so, with the introduction of more aggrieved portfolios in the multi-fund structure comprising of RSA funds 1, 2, & 3, PFAs can invest in riskier securities and enhance their returns. However, the reality of things is that the smaller PFAs don’t have what it takes to effectively market to that effect. With the gains being made from the sector not particularly extraordinary, it is easier for them to employ their available resources into expanding their core business. There is also the fact that their focus now rests on meeting the new capital requirements laced by NAICOM. Like Monopoly, the next smart move is to sell underperforming assets just to keep their head above water.
Olasiji Omotayo, Head of Risk in a leading pension fund administrator, explained that “Most insurance businesses selling their pension subsidiaries may be doing so to raise funds. Recapitalization is a major challenge now for the insurance sector and the Nigerian Capital Market may not welcome any public offer at the moment. Consequently, selling their pension business may be their lifeline at the moment. Also, some may be selling for strategic reasons as it’s a business of scale. You have a lot of fixed costs due to regulatory requirements and you need a good size to be profitable. If you can’t scale up, you can also sell if you get a good offer.”
What the future holds
With the smaller PFAs spinning off, the Pension industry is about to witness the birth of an oligopoly like the Tier 1 players in the Banking sector. Interestingly, the same will also happen with Insurance. The only real issue is that we will now have limited choices. In truth, we don’t necessarily need many of them as long all firms remain competitive. But there is the risk that the companies just get comfortable with their population growth-induced expansion while simply focusing on low-yielding investments. The existence of the pandemic as well as the really low rates in the fixed-income market is, however, expected to propel companies to seek out creative ways to at least keep up with the constantly rising rate of inflation.
Nigerian Banks expected to write off 12% of its loans in 2020
The Nigerian banking system has been through two major asset quality crisis.
The Nigerian Banking Sector has witnessed a number of asset management challenges owing largely to macroeconomic shocks and, sometimes, its operational inefficiencies in how loans are disbursed. Rising default rates over time have led to periodic spikes in the non-performing loans (NPLs) of these institutions and it is in an attempt to curtail these challenges that changes have been made in the acceptable Loan to Deposit (LDR) ratios, amongst others, by the apex regulatory body, CBN.
Projections by EFG Hermes in a recent research report reveal that as a result of the current economic challenges as well as what it calls “CBN’s erratic and unorthodox policies over the past five years,” banks are expected to write off around 12.3% of their loan books in constant currency terms between 2020 and 2022, the highest of all the previous NPL crisis faced by financial institutions within the nation.
Note that Access Bank, FBN Holdings, Guaranty Trust Bank, Stanbic IBTC, United Bank for Africa and Zenith Bank were used to form the universe of Nigerian banks by EFG Hermes.
Over the past twelve years, the Nigerian banking system has been through two major asset quality crisis. The first is the 2009 to 2012 margin loan crisis and the other is the 2014 to 2018 oil price crash crisis.
The 2008-2012 margin loan crisis was born out of the lending institutions giving out cheap and readily-available credit for investments, focusing on probable compensation incentives over prudent credit underwriting strategies and stern risk management systems. The result had been a spike in NPL ratio from 6.3% in 2008 to 27.6% in 2009. The same crash in NPL ratio was witnessed in 2014 as well as a result of the oil price crash of the period which had crashed the Naira and sent investors packing. The oil price crash had resulted in the NPL ratio spiking from 2.3% in 2014 to 14.0% in 2016.
Using its universe of banks, the NPL ratio spiked from an average of 6.1% in 2008 to 10.8% in 2009 and from 2.6% in 2014 to 9.1% in 2016. During both cycles, EFG Hermes estimated that the banks wrote-off between 10-12% of their loan book in constant currency terms.
The current situation
Given the potential macro-economic shock with real GDP expected to contract by 4%, the Naira-Dollar exchange rate expected to devalue to a range of 420-450, oil export revenue expected to drop by as much as 50% in 2020 and the weak balance sheet positions of the regulator and AMCON, the risk of another significant NPL cycle is high. In order to effectively assess the impact of these on financial institutions, EFG Hermes modelled three different asset-quality scenarios for the banks all of which have their different implications for banks’ capital adequacy, growth rates and profitability. These cases are the base case, lower case, and upper case.
Base Case: The company’s base case scenario, which they assigned a 55% probability, the average NPL ratio and cost of risk was projected to increase from an average of 6.4% and 1.0% in 2019 to 7.6% and 5.3% in 2020 and 6.4% and 4.7% in 20201, before declining to 4.9% and 1.0% in 2024, respectively. Based on its assumptions, they expect banks to write-off around 12.3% of their loan books in constant currency terms between 2020 and 2022, a rate that is marginally higher than the average of 11.3% written-off during the previous two NPL cycles. Under this scenario, estimated ROE is expected to plunge from an average of 21.8% in 2019 to 7.9% in 2020 and 7.7% in 2021 before recovering to 18.1% in 2024.
Lower or Pessimistic Case: In its pessimistic scenario which has a 40% chance of occurrence, the company projects that the average NPL ratio will rise from 6.4% in 2019 to 11.8% in 2020 and 10.0% in 2021 before moderating to 4.9% by 2024. It also estimates that the average cost of risk for its banks will peak at 10% in 2020 and 2021, fall to 5.0% in 2022, before moderating from 2023 onwards. Under this scenario, banks are expected to write off around as much as 26.6% of their loan books in constant currency terms over the next three years. Average ROE of the banks here is expected to drop to -8.8% in 2020, -21.4% in 2021 and -2.9% in 2022, before increasing to 19.7% in 2024.
Upper or optimistic case: In a situation where the pandemic ebbs away and macro-economic activity rebounds quickly, the optimistic or upper case will hold. This, however, has just a 5% chance of occurrence. In this scenario, the company assumes that the average NPL ratio of the banks would increase from 6.4% in 2019 to 6.8% in 2020 and moderate to 4.8% by 2024. Average cost of risk will also spike to 4.2% in 2020 before easing to 2.4% in 2021 and average 0.9% thereafter through the rest of our forecast period. Finally, average ROE will drop to 11.6% in 2020 before recovering to 14.4% in 2021 and 19.0% in 2024.
With the highest probabilities ascribed to both the base case and the pessimistic scenario, the company has gone ahead to downgrade the rating of the entire sector to ‘Neutral’ with a probability-weighted average ROE (market cap-weighted) of 13.7% 2020 and 2024. The implication of the reduced earnings and the new losses from written-off loans could impact the short to medium term growth or value of banking stocks. However, in the long term, the sector will revert to the norm as they always do.
Even with a 939% jump in H1 Profit, Neimeth still needs to build consistency
Neimeth has been one of the better performers in the stock market in the last one year.
Neimeth’s profit after tax for H1 2020 might have jumped by 939% from H1 2019, but there’s still so much the company needs to do to remain in the game.
For the first time in years, Pharmaceutical companies across the globe are in the spotlight for a good reason. As the COVID-19 pandemic rages on, the world waits patiently for this industry to produce a vaccine that can once again lead us back to the lives we all missed. Nigeria is also not an exception, it seems. One of Nigeria’s oldest pharmaceutical companies, Neimeth, has been one of the better performers in the stock market in the last one year. However, there is still so much the company needs to do to earn profits consistently.
Neimeth’s recently released H1 2020 results show a jump of 19.4% in revenue from ₦976 million earned in H1 2019 to ₦1.165 billion in H1 2020. While this is impressive, its comparative Q2 results (Jan-March ‘ 20) show a drop in revenue of 25.4% from ₦748.8 million earned in Q2 2019, to the ₦568.7 million revenue in Q2 2020. In similar vein, while its profit-after-tax soared by 939% from ₦5.447 million in H1 2019 to ₦56.596 million in H1 2020, its quarter-by-quarter results show a drop of 118%. While there is a truth that some months are better performers than others, Neimeth’s extreme profit jump in the half-year results juxtaposed with the more-than-100% drop in the first quarter of this year, reveal wide-gap volatility in its earning potential. Its revenue breakdown attributes the quarter-by-quarter drop in revenue to a comparative drop in its ‘Animal Health’ product line by a whopping 897.42%. The ‘Pharmaceuticals’ line also only experienced a marginal jump of 2.57%.
Full report here.
Current & Post-Covid-19 Opportunities
A 2017 PWC report had revealed that by 2020 the pharmaceutical market is expected to “more than double to $1.3 trillion. Mckinsey had also predicted that come 2026, Nigeria’s pharma market could reach $4 billion. The positive outlook of the industry is even more so, following the disclosure by the CBN to support critical sectors of the economy with ₦1.1 trillion intervention fund.
The CBN governor, Godwin Emefiele, had stated that about ₦1trillion of the fund would be used to support the local manufacturing sector while also boosting import substitution while the balance of ₦100 billion would be used to support the health authorities towards ensuring that laboratories, researchers and innovators are provided with the resources required to patent and produce vaccines and test kits in Nigeria.
While manufacturing a vaccine for the Covid-19 pandemic might be nothing short of wishful, the pandemic presents a global challenge that businesses in the healthcare industry could leverage. Through strategic R&D, it could uncover a range of solutions, particularly those that involve the infusion of locally-sourced raw materials.
In order for the company to attain sustainable growth, it needs to come up with structures and systems that are dependable, while also tightening loose ends. One of such loose ends is its exposure to credit risk. It’s Q2 2020 reports reveal value for lost trade receivables of N693.6 million carried forward from 2019. To this end, it notes that while its operations expose it to a number of financial risks, it has put in place a risk management programme to protect the company against the potential adverse effects of these financial risks.
At the company’s last annual general meeting (AGM), the managing director, Matthew Azoji, had also spoken on the company’s efforts to gain a larger market share through its initiation of bold and gradual expansion strategies.
The total revenue growth and profitability of the half-year period undoubtedly signals a potential in the company. However, we might have to wait for the company’s strategies to crystalize and attain a level of consistency for an extended period before reassessing the long-term lucrativeness of its stock or otherwise. That said, it certainly should be on your watchlist.