Seplat has been in the news for a lot of not-so-favourable reasons over the past few years. First, there were swindling allegations to the tune of over N600 billion involving its OML partner, NPDC. Seplat had denied all allegations even though NPDC had pleaded guilty. There’s also a series of ill news and bad PR involving its Chairman, A.B.C Orjiako, including one where AMCON had instructed that his assets be seized.
So many shares have also been sold – or transferred – from about 3.5 million units of ordinary shares indirectly held by the Chairman being sold, to the CEO of the company also transferring all his remaining shares to Professional Support Limited “PSL”, an entity wholly controlled by him. PSL is also the 4th largest shareholder of Seplat with 6.6% holding. Even in its expansionary activities that have propelled the company to purchase a number of companies, it had been accused of not being transparent. Its purchase of Eland Oil & Gas had particularly been sanctioned by a court as a result of its scheme of arrangement on the acquisition.
Q1 2020 also came with its own challenges with the company expectedly being adversely impacted by the COVID-19 pandemic and the global oil crisis by virtue of it. For the company, success is largely dependent on its oil activities. Crude oil represents about 83% of the company’s revenues; gas, a much smaller portion.
Consequently, the company recorded operating losses of $105.8 (N34.3 billion) in Q1 2020 against a profit of $35.8 (N10.9 billion) which was recorded for the corresponding period in 2019 – a huge decrease of 395.5%. While it had tried hedging oil, the company is set to suffer more losses, especially from inventory pile-ups and loss of business.
Eyes have naturally been on the company in a bid to try to keep up with its changing structure, litigation issues, and its little capitalization moves like the June 2020 announcement of Sustainable Capital Alpha Fund as a new major shareholder with a direct interest of 5.11%, pushing it to the top 5 on the largest shareholders list. It is with this same wariness that the company’s announcement to transfer its key OMLs have been received.
The OMLs and their transfer
Seplat scored it big when after just a year of its 2009 incorporation from the partnership between Shebah Petroleum Development Company Limited and Platform Petroleum Joint Ventures Limited, it acquired a 45% participating interest in a portfolio of three onshore producing oil and gas blocks in the Niger Delta – OMLs 4, 38 and 41. Even today, out of its vast portfolio of assets located in the Niger Delta region, these OMLs, which were acquired in July 2010 alongside NPDC as part of the agreement of the NPDC/Seplat Joint Venture, are still its biggest catches. The same OMLs have also led Seplat to become a major supplier of gas to the Nigerian domestic market.
Last week, however, the company announced the transfer of business activities and assets of OMLs 4, 38 and 41 from the Holding Company to its subsidiary, Seplat West Limited. In addition, the transfer was backdated to be effective from January 1, 2020, indicating that no operating oil and gas assets will be directly held in the Holding Company. The company claims that the transfer is designed towards segregating the businesses of the group in a more efficient manner while also reducing risk, cost, and complexity.
While it explicitly stated that the outcome of the transfer will not, in any way, result in loss of tax revenue to the Government or extinguishment of liabilities – or diminish shareholder value, the implications of the transaction, and the opportunities it could birth for the company are pretty interesting.
Clearly, the company has had a lot to deal with. Between occasionally trying to absolve itself from the missteps of its chairman to certain transactions gone wrong, it has had to face reputational issues threatening investors’ perception of the company. With the impact of COVID-19 deep in its business, the company is expected to have a difficult financial year. This presents one way the transfer could help the company.
It is possible that the bad PR it has suffered at different points have affected its share price. While the transfer of assets to another subsidiary might not change things in relation to tax or change the losses, it helps indemnify the company from risks. For one, creating the group shields subsidiary companies from potential takeover. Conversely, it also means that the company can secure direct investments into the subsidiary without passing through the scrutiny of investing in a listed company.
That’s not all. By carving out the subsidiary, the Holdco can take on debts or borrow on behalf of the subsidiary, take on related costs, and then declare losses with the subsidiary having the opportunity to be profitable. These may not be its intentions but HoldCos often play this way.
Seplat also announced the retirement of its pioneer Managing Director and later CEO, Mr Austin Avuru which will be effective from July 2020. The transfer also presents a good opportunity to shuffle the company’s positions of leadership between the Holdco and its subsidiaries.
Needless to say, these are at best speculations and projections. Time will reveal what this company has in store for us as well as the plans it has to ensure its sustainability and its survival in these trying times.
Analysis: Access Bank’s valuation highlights merger blues
Access Bank is valued much less than its peers and this is why.
From green bonds to foreign listings and a determination to plant its seeds across various nations on the African continent, Access Bank over the past few years has shown its desire to grow across its triple-bottom-line.
On the people front, the bank has a reputation for offering arguably the best incentives to its employees in the banking sector even though last year’s plan to cut down salaries threatened to dent this reputation.
It has also introduced some of the sector’s most innovating products aimed at driving financial inclusion and protecting the bank’s market share from FinTechs. The bank has also supported small businesses through loans and financial advisory in line with the CBN’s quest to improve private sector credit.
On the environmental front, it’s spending big bucks on CSR, making a name for itself as a leader in Sustainability, and in terms of dominance, its merger with Diamond Bank and other expansionary measures have turned it into Nigeria’s largest bank and one of Africa’s top banks.
While these moves have shed a positive light on the bank, investors are left to play catchup as the benefits of the mergers and acquisitions are yet to result in improved return on investment for anyone who bought the shares over a year ago.
Its low Return on Investment (ROI)
While Access Bank has many strides to its name, a lot more needs to be done to make it a winner with investors. Its share price has struggled to gain the same momentum achieved by its rivals in the banking sector, particularly the FUGAZ.
Year to date 2020 Access Bank stock has performed poorly when compared to its peers. While the likes of Zenith Bank (33%), UBA (21%), Fidelity (23%), and FCMB (80%) posted double-digit returns, Access Bank fell by 16% in 2020.
In terms of value, the market prices the stock lower when compared to its earnings, making it one of the cheapest stocks in the sector. This is buttressed by its 2.9x (as of January 22nd) price to earnings ratio, one of the lowest in the sector.
In the same vein, the Tier 1 bank also has a lower dividend yield compared to its contemporaries and has not been able to breach its 52-week high of N10.90. One reason for this is that investors are wary of the bank’s loan book mostly inherited from its merger with Diamond Bank. Investors will rather go with some Tier 2 banks that have better upward trends in price appreciation than getting stuck with low valuation multiples.
Access Bank merger blues
As mentioned, one Achilles heel to its valuation problems could be its aggressive expansion strategy, driven by acquisitions. Since its acquisition of Diamond Bank, its valuation has plummeted piling on paper losses for investors who have held the stock since then.
Access Bank is currently valued at N325.2 billion in market capitalization less than half of its N679 billion suggesting a price to book ratio of 0.47x.
While being large provides the benefits of economies of scale, it needs to be nimble and focussed to milk the opportunities provided by the synergies
The bank recognizes this challenge, recently holding an investor call where it explained its move towards a HoldCo structure.
Access Bank will maintain four core subsidiaries under the holding company. They are Access Bank Group – focussed on commercial banking services, Payment Business – its mobile money and payment services business, Lending & Agency Banking – microfinance and microlending services, and Insurance.
Its efforts in restructuring into a HoldCo structure as well as expansions to other African regions – from Kenya to South Africa, is expected to further enhance its overall returns, and perhaps drive up valuations.
Fundamental analysis of recent financials
Access Bank has recorded positive strides in terms of its fundamentals. In its latest 9 months results, net interest income decreased by 6.6% year-on-year, but profits increased by 15% to N102.3 billion.
Access Bank also implements one of the most aggressive recoveries of bad loans in the banking sector pulling in N38.9 billion in recovery in 2019 and N24.7 billion in the first 9 months of this year. These recoveries filter into the bottom line and bolster confidence about its ability to confront its challenges and win.
How Access Bank got Japaul to pay up N37 billion loan that had gone bad
Brute force, Courts, quid quo pro are hallmarks of Access Bank’s debt recovery schemes.
In 2018 when Access Bank took over Diamond Bank, in what is the largest merger in Nigeria’s banking history, they knew it was not a match made in heaven like their PR agencies will make you believe.
In merging with Diamond Bank and taking over their juicy assets, they had also taken over the lemons that had for years bedeviled the bank who had pioneered mobile banking applications well ahead of its time.
When Access Bank merged with Diamond Bank, the latter had total loans and advances of N787.8 billion out of which N219.9 billion in loans were impaired. Oil and gas-related loans made up a significant chunk of the loans and were estimated at about N302.6 billion, most of them distressed.
Included in the oil and gas loans was a $66.4 million in loans owed to the bank by Japaul Oil and Maritime, as they were referred to at the time. The loans had gone bad accumulating unpaid interest of about $11.2 million. By the time Access Bank took over the loans, Japaul agreed to a restructuring rolling over both the principal and interest.
This is typical of most Nigerian companies burdened with debts they cannot pay. To avoid being run over by the bank, the debtors will negotiate a restructuring, extending the loans by one to three years and if lucky, reducing the interest rates. In return, the bank books new fees (which are often paid in advance of the restructuring) and then gets to avoid huge provisioning mandated by the central bank.
It is often a ‘win-win’ situation that essentially kicks the can down the road until, like in the case of Diamond Bank, the chicken comes home to roost. But Access Bank is not new to slugging it out with debtors, particularly those who do not pay up. Upon takeover in 2019, Herbert Wigwe, the CEO of Access Bank announced that his bank was going to go after Diamond Bank debtors. In an interview in 2019 he maintained that “we recovered N2.2 billion bad debt in the year under review. Access Bank will intensify effort to ensure that it recovers the debt owed to Diamond Bank. We will go out for Diamond Bank’ debtors and if they are not ready to redeem their debt we will publish their names in the newspapers.”
In 2019, Access Bank swooped on Japaul Plc seeking repayment of their Diamond Bank loans which was now about N37 billion. The bank took over Japaul’s trading assets and integral to the going concern status of the company. Before now, Japaul made money rendering marine services, dredging, mining and construction mostly for the oil and gas companies.
But business has been bad for years now leading the company into net accumulated losses of over N50 billion as of 2018. For the 5 years leading to 2018, the company posted back to back losses with revenues going from N5.3 billion in 2015 to about N85.8 million in 2019. External loans had also ballooned from about N18.8 billion to about N38.8 billion. Its share price had also fallen to about 20 kobo per share by the end of 2019. It was nearing bankruptcy and something had to give.
They began a court battle with Access Bank over the loans and the threat of a liquidation eventually settling for a deal. Sources inform Nairametrics that Access Bank is one of the most aggressive banks in the business when it comes to playing dirty with debtors. Unlike Diamond Bank, Access Bank is ready to battle in the courts and is ready to deploy any legal means necessary to recover their loans even if their actions are viewed as uncanny.
Recently, the bank obtained a Mareva injunction sealing the offices and taking over the assets of Seplat due to a related party loan owed by the latter’s Chairman, ABC Orjiakor. Just like Japaul, the loans owed by ABC Orjiakor were also obtained from Diamond Bank. According to sources, when Access Bank swoops in for their loan recoveries, they deploy all tactics in the books to ensure all or most parts of the loans are recovered from chronic debtors.
Eventually, Access Bank and Japaul agreed to settle the matter outside the court. In exchange for repaying the N38 billion loan, Access Bank settled for a repayment of N30.9 billion. The deal involves Access Bank taking over two of Japaul’ s Dredgers (12& 13) for N5 billion and a Barge (Beau Geste) for N25.9 billion. Japaul also gave up its land in exchange for working capital of N1.5 billion from the bank.
In return, Japaul gets to clean up its balance sheet erasing what is left of its debt, booking a profit of about N40 billion and wiping off its negative equity of N35.5 billion. However, in one fell swoop. From negative equity of N35.5 billion, the company’s net assets are now N4.69 billion. A win-win for everyone.
We are not exactly sure what Access Bank plans to do with dredgers and barges it took over from Japaul. Interestingly, in the deal, Japaul also gets to lease back the two dredgers for a period of 6 years from Access Bank for a sum of N1 billion paid annually from 2021 – 2026. Japaul got a one-year moratorium on repayment expiring in December 2020.
Japaul has since changed its name to Japaul Gold and Ventures citing the dwindling oil and gas sector for its reasons. The company believes gold mining and technology are the future and is seeking to raise N25 billion in equity to pursue this course. Its share price has ostensibly risen by 150% since the turn of the new year, the best performing on the stock exchange.
For Access Bank, aggressively going after bad loans have paid off immensely. In 2019 the bank recovered N38.9 billion in bad loans barely a year after taking over Diamond Bank. In the first 9 months of 2019, a total of N24.7 billion was captured in bad debts recovered. It is a strategy that is working and there is no betting against Access Bank doubling down on aggressive recovery this year.
Champion Breweries, Raysun deal highlights disclosure shortcomings
Is Heineken taking over Champions Brewery?
Champion Breweries Plc informed the Nigerian Stock Exchange, last week, via a press release that an insider, Raysun, had purchased about 1.9 billion shares at a price of N2.6 per share.
The disclosure was part of the stock exchange’s requirement that listed companies must reveal deals made by insiders of the company for the benefit of shareholders and the investor community.
That’s about how far the press release went. It did not reveal why Raysun was purchasing? Who they purchased the shares from and why the deal is being consummated? In terms of corporate disclosure, this was a dud.
Raysun is the largest shareholder and majority owner of Champions Breweries. Raysun is also an entity owned by Heineken, the majority shareholder in Nigeria Breweries Plc – the largest brewer in the country. Thus, Heineken is an indirect shareholder of Champions Breweries.
These relationships give this deal enough scrutiny to warrant a better disclosure starting from the actual purchase of shares revealed in the press release.
Here are some contexts;
Champion Breweries shares breakdown
- Champions Breweries has a total of 7.82 million shares outstanding at the time of this purchase
- Raysun held about 60.4% shares in Champions Breweries according to disclosure in its 2019 annual report.
- Asset Management Nominees and Akwa Ibom Investment Corporation own 12.3% and 10% respectively. The rest of its shareholders own about 17.3% or 1,351,954 units.
- At the current share price of N1.12, Champion Breweries is valued at N10.57 billion by the market.
- However, Raysun’s purchase of 1.9 billion shares at N2.6 per share (valued at N4.9 billion, almost half of the current market capitalization), now values the company at about N20.3 billion.
Where did the shares come from? This is a vital question and here is why.
Going by the number of shares they bought last week (24% of equity), they only could have been able to purchase that many shares by buying up all the shares owned by the Asset Nominees (12.3%), all the shares owned by Akwa Ibom Investment Corporation (10%) and another 3% from other regular shareholders.
It could also be that either or both Asset Nominees and Akwa Ibom IC sold part of their shares and then they made up the rest by purchasing some from the market. Why is Heineken, through Raysun, acquiring so many shares? Is there a takeover deal in the offing? Do they plan to merge Champions Breweries with Nigeria Breweries or still keep it as a standalone company? Will Champions Brewery cease to exist if there is a merger or will they delist following this massive acquisition of the shares of their subsidiary?
The speculation is palpable.
This is what happens when listed companies refuse to properly disclose transactions involving mega share purchases of this nature. How does a majority shareholder go from 60.4% of shares to 84% and an announcement is not made explaining or clarifying who sold and if this is a takeover bid.
But investors seem not to mind at the moment, if the momentum of the share price is anything to go by. A 57% year to date gain is a testament to this. It appears investors expect a mandatory takeover announcement to be made anytime soon and are scrambling for the shares ahead of any announcement.
Unfortunately, this is not how markets should work anywhere, and the sooner it stops the better. The Nigerian Stock Exchange has made massive progress with compliance to disclosure requirements and we believe strongly that they will at some point bring Champion Breweries to order and have them disclose all the requisite information about this transaction. Better late than never.