On October 28, 2024, Transnational Corporation Plc (Transcorp Group), Nigeria’s leading listed conglomerate, announced the successful completion of its share reconstruction, a strategic action the company said is aimed at maximizing long-term shareholders’ value.
The share reconstruction involved a consolidation of the total number of issued shares at a ratio of 1 to 4, reducing the total issued and fully paid shares of Transcorp Group 40.6 billion shares to 10.2 billion shares.
Whilst the number of shares reduced pro rata, the total value of shareholders’ investments remains unchanged with no dilutive impact on shareholders.
Commenting on the share reconstruction, Owen D. Omogiafo OON, President/GCEO of Transcorp Plc, said, “This share reconstruction is in line with the Company’s corporate strategy and growth plan and is aimed at maximizing shareholder value. The reconstruction will bring the company’s capital structure to a manageable position.
The reduced share count theoretically enhances per-share metrics like Earnings Per Share (EPS) and Dividend Per Share (DPS), potentially attracting institutional investors and lowering share price volatility.
Typically, share reconstruction affects a company’s share structure and, possibly, its market capitalization, depending on investor response.
Pre-reconstruction, Transcorp’s market capitalization stood around N449.16 billion, based on a share price of N11.05. Following the announcement, the share price surged to N48.60, raising the company’s market capitalization to N493.87 billion, an increase of 9.9% over its previous value.
October 2024 alone saw a 298% stock gain, ranking Transcorp as the NGX’s top performer and raising its year-to-date gain to 428%. Prior to the reconstruction.
This immediate market reaction reflects increased investor confidence, partly spurred by the reconstruction. However, while promising, sustaining this momentum will hinge on Transcorp’s ability to deliver consistent financial performance and strategic execution.
Strong fundamentals point to the potential for a sustained rally
A closer look at Transcorp’s financial performance indicates that, beyond the share reconstruction, the company’s robust fundamentals may continue to support the rally.
Transcorp has an impressive revenue growth, with a 5-year compound annual growth rate (CAGR) of 27%.
In 2023, revenue rose by 47% to N197 billion, and as of the first nine months of 2024:
- Revenue increased by 133%, reaching N298 billion, surpassing 2023’s full-year figure by 50%.
- Profit before tax surged by 303% to N105.5 billion, 76% higher than 2023’s profit and above its 5-year CAGR of 65%.
- Profit margins remain strong, with a return on equity of 30% for the nine months ending in 2024.
- Balance sheet health is solid, with improvements in the debt-to-equity ratio, a decline in leverage, and an increase in liquidity to 3.30x.
Owen Omogiafo, OON, President and Group Chief Executive Officer of Transcorp Group, noted that Transcorp’s growth reflects its focus on innovation, operational excellence, and investment in high-growth sectors like energy and hospitality. She stated,
“As we approach year-end, we will enhance operational efficiency, invest in high-growth sectors, and deliver long-term value to our shareholders.”
The market appears to support this growth outlook, as indicated by the company’s price-to-sales (P/S) ratio of 1.27.
This valuation suggests that investors are optimistic about Transcorp’s future prospects, valuing the company slightly above its annual revenue.
This premium implies that investors foresee a promising growth trajectory, aligning with Transcorp’s long-term ambitions.
It is crucial for Transcorp to continue sustaining this growth to validate the positive market sentiment, justify its current valuation and achieve the aim of the share reconstruction overall.
Cost pressures may present a challenge
However, sustaining this growth is critical to maintaining market confidence and justifying the valuation increase.
A potential challenge for Transcorp is rising operational costs, which could impact on margins if not managed effectively.
In the first nine months of 2024, despite robust revenue growth, cost pressures were evident due to higher natural gas and fuel prices:
- The cost of sales rose by 158%, with natural gas and fuel costs increasing by 211.41% to N138.644 billion, representing 47% of total revenue.
- This resulted in an 11% decline in the gross profit margin, down to 45%.
These cost pressures highlight the importance of operational efficiency to counterbalance expenses and sustain profitability in the face of external market pressures.
Takeaways for shareholders and investors
- For shareholders, Transcorp’s current momentum offers significant potential for value appreciation, supported by a solid financial foundation and strategic growth outlook.
- The share reconstruction has positively impacted per-share metrics, while the company’s underlying revenue growth and robust performance suggest that it could continue delivering strong returns.
- However, cost management will be key in determining how well Transcorp can sustain this growth trajectory.
- Investors should watch for Transcorp’s ability to manage operational costs while maintaining growth in core revenue streams.
- A consistent focus on these areas would enhance the likelihood of continued share price appreciation and value creation for long-term shareholders.