- United Capital Plc’s Half Year 2023 results revealed a mix of positive performance indicators and challenges impacting profitability.
- The company’s growth in earnings and consistent operating income provides a solid foundation for future growth.
- However, factors such as increased tax expenses and impairment for credit loss need careful monitoring.
- The stock’s undervalued position, reflected in the P/E and relative P/E ratios, presents an opportunity for investors seeking long-term value.
- By closely managing risks and focusing on expense optimization, United Capital Plc can navigate challenges and enhance shareholder value.
United Capital Plc, a leading pan-African investment banking and financial services group, recently released its Half Year 2023 results, showcasing positive performance indicators.
However, various factors have impacted the company’s profitability and share price performance.
Growth in Earnings and Profitability
In 2022, although profit after tax (PAT) experienced a decline of 5.71%, the company’s compounded annual growth rate (CAGR) stands at 17.35% in PAT over the past five years.
United Capital Plc recorded a noteworthy 21% year-on-year growth in gross earnings, reaching N11.01 billion for the first half of 2023.
Profit before tax (PBT) also saw a 6% increase, amounting to N5.54 billion and a 5.71% growth after tax (PAT), reaching N4.69 billion.
Challenges Impacting Profitability
While the first half results provide a positive outlook, it is essential to examine the company’s performance trend and consider other factors that may influence its performance for the remainder of the year.
The decline in PAT in 2022 can be attributed to various factors. Firstly, there was a significant increase in tax expenses, resulting in a negative impact on net income.
Tax expenses grew by an astounding 483%, contributing to the decline in PAT.
Additionally, the company faced challenges related to impairment for credit loss, which grew by 1,261% year-on-year in 2022.
The surge in loss allowance on other financial assets at amortized cost, from N362 million in 2021 to N5.657 billion in 2022, reflects the growing provisions made for potential credit losses.
Also, United Capital Plc encountered an increase in selling, general, and administrative (SG&A) costs as a percentage of sales.
The rise from 11.30% to 15.38% suggests higher expenses associated with operational activities.
These costs/losses have been reflected in the company’s margin growth. While the company has maintained consistent positive operating income, the growth rate has declined over time.
Operating profit growth declined from 8.7% in 2022 to 4.38% in Q1, 4.35% in H1, and negative growth of 3.45% in Q2. This trend calls for a closer examination of expense management strategies to optimize profitability.
Share Price Performance and Valuation
United Capital’s stock has witnessed a significant decline of 19.88% from its 52-week high, indicating a decrease in the market value of the company’s shares.
Additionally, the share price has lost 2.14% this year and an additional 10% from June 14th to date, reflecting a shift in investor sentiment.
However, the company’s price-to-earnings ratio (P/E ratio) of 8.3x, lower than the NG market P/E ratio of 8.5x, suggests that the stock is trading at a relatively lower valuation compared to the overall market.
This presents a potential opportunity for investors.
Furthermore, the relative P/E ratio of 0.74x indicates that the stock is undervalued compared to industry peers, suggesting potential for future earnings growth.
Moreover, United Capital’s stock offers an attractive feature for income-oriented investors seeking regular income streams.
The current share price of N13.70 provides a dividend yield of 10.95%, with the company’s dividend payment of N1.50 representing a return of 10.95% on the investment made in the stock.
This dividend yield is higher than the industry average of 6.6%, indicating a relatively higher return to shareholders in the form of dividends compared to other industry companies.
Implications and Investment Opportunities
Despite the challenges faced by United Capital, including the rising impairment of credit loss and the decline in share price and investor sentiment, there are still investment opportunities to consider.
Firstly, it is important for investors to closely monitor the company’s credit risk management efforts.
The significant increase in impairment of credit loss poses a potential threat to the company’s profitability.
Secondly, monitoring the company’s expense structure is crucial.
As expenses grow, it becomes essential for United Capital to effectively manage costs and improve operational efficiency.
By implementing cost control measures and optimizing expenses, the company can enhance its profitability and mitigate the impact of rising expenses on its bottom line.
Investors should carefully evaluate United Capital’s performance and strategies to assess potential investment opportunities.
While challenges exist, the company’s positive performance indicators, undervalued stock, and the potential for improvement in credit risk management and expense structure present opportunities for investors looking for long-term growth and value in their investment portfolios.
