Last month, Caverton Offshore Support Plc unveiled eleven newly acquired helicopters, and by so doing, increased its total fleet to seventeen. This move is indicative of the oil services company’s expansion drive. Recently, the company emerged winner (after a competitive tendering process) to become the sole air transportation services provider for the Chevron/NNPC joint venture in Escravos.
Therefore, in light of the foregoing, and also bearing in mind that the oil and gas sector has shown considerable improvement in recent times, it is safe to speculate that the company is in for good times. But there are some caveats.
An overview of Caverton
Caverton Offshore Support Plc is a marine and aviation logistics company which operates in Nigeria’s oil and gas sector. The company is estimated to have close to 80% market share. Caverton was incorporated in 2008 and positioned for the acquisition of Caverton Marine Limited and Caverton Helicopters Limited, two previously existing logistics companies that were incorporated in 1999 and 2002 respectively.
Caverton became a group following the acquisitions. Also, the company is currently quoted on the Nigerian Stock Exchange. It is on a mission to fully take advantage of the Nigerian Government’s ‘Local Content Policy’.
As an aviation and maritime logistics company operating in Nigeria’s oil and gas sector, Caverton is focussed on providing transportation and environmental support services to its many clients. In specific terms, the company provides emergency/medical evacuation services, maritime and coastal surveillance services, search and rescue operations, etc.
Since inception in 2008, Caverton Offshore Support Plc has ensured to operate by well-defined business objectives, one of which is to become a major player in the oil and gas sector, not only in Nigeria but also in most parts of Africa. From all indications, it can only be said that the company has considerably actualised much of this objective, mostly “by drawing from both global offshore experience acquired from its strategic partners and the service delivery competence of its member companies.”
In 2014, Caverton became Nigeria’s first offshore support company to be listed on the Nigerian Stock Exchange. At the Initial Public Offering (IPO) on May 20th, Caverton offered about 3.35 billion shares, raising about $197 million. Caverton’s success notwithstanding, it is important to note that there is a need for improvement.
Oil price effects on Caverton’s financial year results
In its financial year report for the year ended December 31st, 2017, Caverton recorded a 6% increase in total revenue. Revenue had risen from ₦19.3 billion in 2016 to ₦20.5 billion last year. In the same vein, profit before tax grew from ₦1.1 billion in 2016 to ₦3.9 billion in 2017. Also worthy of note is the fact that the company’s total asset for the year grew higher than its total liabilities, standing at ₦46.25 billion (as against ₦41.35 billion in 2016), and ₦30 billion (as against ₦28 billion in 2016) respectively. In total, the company’s profit grew from ₦612.2 million in 2016 to ₦2.6 billion in 2017.
Note that the noticeable improvement in Caverton’s 2017 financial result is due mainly to the gradual rise in global oil prices. The company’s profit had taken a hit back in 2016 due to poor oil prices which not only affected the oil companies but also, the Nigerian economy in general. Apparently, the decline in global oil prices led to lesser contracts for Caverton, as most of its clients struggled to survive the economic hardship necessitated by the ensuing recession.
Favourable global oil outlook in 2018
In 2018, global oil price has been on a steady rise, recently surpassing $75 and projected to reach $80 soon. The Organisation of Petroleum Exporting Countries (OPEC) had in 2017 put in place a mechanism that reduced oil output, and by so doing, reduced global crude supplies, a situation that ultimately resulted in a price spike.
Meanwhile, the trend is expected to continue thanks in part to the United States of America’s impending sanctions on Russia and Iran for their interference in the Syrian war. This sanction would see a ban placed on crude exportation of these two countries, a situation that has tightened the crude oil market and inevitably increased prices.
Why a spike in global oil prices is favourable to Caverton
The nature of Caverton’s business model is such that its services are most needed when its customers are making money. What this means, therefore, is that as global demand for crude oil rises, oil companies in Nigeria benefit from the subsequent rising prices, even as they require more logistics services which Caverton provides. Caverton, on the other hand, makes more money when its services are in demand.
Right now, global oil prices are at its peak since 2014, meaning that demand for crude is on the increase. Nigeria is one of the world’s biggest crude oil exporters, and most of the oil companies in Nigeria comprise of Caverton’s customer base. Consequently, as oil prices continue to rise, Nigerian oil companies will demand more of Caverton’s services. This will, in turn, lead to a projected profit increase for the company in 2018.
But there are some caveats…
It is apparent that Caverton is in for good times in 2018. Not only does the market look promising, the company has already signed a major contract and upgraded its fleet in readiness for expansion and profitability this year. But all these are chiefly dependent on whether the global oil prices will remain stable. And even in the circumstance that prices remain stable and favourable, Caverton must also be prepared to check its competition.
Currently, the company contends with Bristow Helicopters and OAS Helicopters for market share. Those two companies are understandably making their own expansion moves with hopes of taking more advantage of the market. More so, Caverton must also ensure to reduce its liabilities and operational costs down.
Also, Caverton must avoid any form of scandal and labour issues that could potentially harm its business operations. Earlier this year, such scandal had resulted in the grounding of its flights following protests by several labour unions, including the National Association of Aircraft Pilots and Engineers (NAAPE) and the Nigeria Union of Petroleum and Natural Gas Workers (NUPENG). The labour unions were protesting what they perceived as the company’s labour discrimination, whereby the juicy positions are given to expatriates, while the not so juicy ones are given to Nigerians. Caverton cannot afford such a scandal, not if it is focused on making profit this year and henceforth. This is because subsequent protests can happen anytime and ground its operations.
It is also important for Caverton to consider diversifying its operations away from the oil and gas sector. At the end of the day, the aim is to make profit and pay dividends to shareholders, something the company has not done in recent times.
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.