NGX market capitalization by N1.8trn. Shares rose by 10% on the first trading day.
What is going on? let us talk about three issues.
Why is it happening?
Why is the share price higher than its former parent?
Is TPP a sound investment?
What is happening?
Transcorp Power Plc (TPP), a subsidiary of Transnational Corporation Plc (Transcorp), listed by introduction its 7.5 billion ordinary shares of fifty kobo on the Nigerian Stock Exchange at N240 per share.
Listing by introduction means listing the existing, entire issued, and fully paid-up ordinary shares of TPP on the Nigerian Stock Exchange without issuing any new shares or raising any capital.
Why is Transcorp Power Being Listed
First, it is essential to note that Transcorp Corporation Plc is not divesting its shares in TPP. Transcorp Power Plc undertook the listing by introduction to provide a platform through which new investors can participate in the Company’s capital and future growth prospects, thereby diversifying the existing shareholder base.
In English, the listing creates a liquidity event for current and future shareholders. This means the existing investors of TP can sell their holdings if they wish, and new investors can also invest directly in the power subsector in Nigeria via TPP.
Thus, TPP can raise capital on its balance sheet without referencing Transcorp Corporation Plc, its parent.
Also, a TPP as a separate entity will allow institutional buyers to diversify their portfolios by adding a non-corelating sector-like power.
Recommended reading: Transcorp Power Plc lists on NGX main board
Why is the share price of Transcorp Power higher than its parent Transcorp Corporation Plc
Can the share price of a subsidiary be higher than that of the parent? Yes, it is unusual, but it does occur. In technical terms, it is called a negative stub, and it occurs when the market value of the parent is less than the market value of the parent ownership in a publicly traded subsidiary.
It represents a situation where the “whole” is worth less than the sum of the parts. An excellent example is the 3Coms spin-off of its Palm division of handheld computers.
Is Transcorp a sound buy?
Power and utilities are usually safe, boring dividend generators. However, TPP is a crucial power provider to Nigeria and the Benin Republic; it still has room to grow and boost earnings.
Most importantly, a stock like Transcorp is not strongly correlated to recession or the overall stock market. Power is an essential cost to all Nigerians but revenue to Transcorp power.
Non-correlation means its “insurance” in your portfolio. Power demand is inelastic, which helps proper pricing even during inflationary periods.
Is this stock priced appropriately?
The share price of any stock represents the present value of future cash flows discounted too today. Thus, future earnings are the best predictor of future stock market prices. So, the question is, can Transcorp increase its profits in the future?
With a 972MW capacity, TPP accounts for about 7% of Nigeria’s power generation capacity, yet it currently generates about 10% of Nigeria’s power with existing assets, with the capacity to contribute further. This means an investment in TP represents a proxy vote on the future growth of Nigeria.
There is more; TP also exported power in 2020; TP signed a bilateral agreement to export power to the Benin Republic; today, 18% of Transcorp’s sales come from exporting power. diversification
TPP has a clear strategic goal of powering 1 in 4 households and industries in Nigeria.
Recommended reading: Transcorp Power starts first day of trading gaining 10%
Finally, Some key numbers
972 MW – Installed Capacity
18 Gas Turbines
Ten million Homes, Schools, Hospitals &
Industries Powered
N142.1bn Revenue – 2023
Strong and Consistent Financial Performance
CAGR of c.20% and 42% in Revenue and PBT, respectively, over the last five years.
Risks?
- consumers don’t pay, leading to revenue compression.
- Country risk
