United Capital Plc has reported profits every year since 2017 accumulating a total earning of N32.743 billion, representing earnings growth of 23% per year.
The latest result from the company for the third quarter of 2022 reveals it also reported a pre-tax profit of N3.8 billion up from N3.3 billion same period last year. This year alone, the company has grown its profit before tax from N7 billion to N9.1 billion in the corresponding first 9 months of this year.
United Capital continues to marvel at its ability to generate incredible profits year after year. Shareholders are also lapping this up as the company continues to reward them with dividends with yields often at double digits. The future cannot be any brighter for this investment behemoth of a company. But there is a small dent of worry lurking behind the scenes.
In a statement, the company explained that the growth trajectory was driven by increasing patronage and expanded activities across all businesses and market segments.
As much as the company has continued to deliver the impressive top and bottom-line numbers, its growth trajectory seems to be stagnating. This is largely due to higher operating expenses that have leaped in line with inflation. For example, this year operating expenses have risen by a whopping 36.7% year on year. United Capital has often earned its stripe by posting margin growth often in double digits. Between 2020 and 2021 profit margin was 48% and 52% respectively. This year, margins are flat at about 53% and might remain around this level this year.
A major driver for this is its personnel expenses which went from N1.3 billion to N1.7 billion in the first 9 months of this year. The company also seems to be racking up credit losses providing for almost a billion naira this year alone. The company claims the losses are due to loans to customers that have now been impaired. This is money that could have added to its bottom line.
The company also acknowledged the rise in operating expenses attributing it to investment in digitization.
- “The Group’s cost-to-income ratio grew by 2.06 percentage points to 39.46% in September 2022 from 37.40% in September 2021 attributable to 28% growth in revenue compared to 35% growth in operating expenses. The growth in operating expenses was driven by 30% growth in other operating expenses arising from our digitalization drive, 33% growth in personnel expenses and 77% growth in impairment allowance in compliance with IFRS 9 which requires financial assets be tested for impairment using expected credit loss model.”
To be fair, higher operating expenses are prevalent in a galloping inflationary environment such as is being experienced in Nigeria. However, United Capital will need to reign in on expenses considering that its revenue base faces potential headwinds.
The central bank’s interest rate hikes amidst rising inflation mean their shareholders will demand higher returns on their mutual fund products. This will impact margins in the short term and to a large extent dividend growth rate (DGR). The companies have increased dividends by a whopping 44% in compounded annual growth rate over the last 5 years. Last year alone it more than doubled its dividend per share to N1.5. This year might be the first in five years where its dividend growth rate (DGR) stagnates, and this is understandable, if it does occur.
The implication is on its share price which for years has relied on its generous dividend pay-outs to rise. Stocks that rely on DGR for their valuation often suffer when there is no growth.
However, United Capital’s share price is up 25% year to date based on a share price of N12.3. It rose to as high as N14.5 back in February. Thus, price growth may have hit a crescendo. Whether this prognosis will turn right or wrong will depend largely on the company’s ability to keep margins up.