Analysis: Spiralling Debts, Exchange Rate Losses Sink Transcorp

Foreign exchange loss on financing activities fueled by a depreciation of the naira has contributed in no small measure to the poor result of  Transcorp of Nigeria Plc. This is despite a 23.5% increase in its top line revenue growth.

The conglomerate giant with investment in hotels, agriculture and energy posted a loss after tax of N12.16 billion in June 2016 as against N4.28 billion as June 2015.

A cursory examination of the financial statement of the company showed it received one-two punch as finance costs of N17.26 wiped out all of operating profit of N4.28 billion in the period under review. Finance costs alone spiked by 636.36 percent.

According to note 25 of the unaudited financial statement of the company, it attributed the huge borrowing costs to FX loss on financing activities of N13.88 billion. Transcorp has over N90 billion in external  interest bearing loans.

While exchange rate loss were exceptional items and do not recur in the life of a firm, the continous depreciation of the Naira further exposes the firm to currency risk if it keeps carrying the loses.

Transcorp interest coverage ratio has entered the ember levels as it dropped to 0.34 percent in June 2016 from 3.13 percent last year, while debt to equity ratio moved to 119 percent in 2016 from 88 percent the previous year.

An interest coverage ratio of 0.95 percent, which is below 1, indicates a company is not generating sufficient revenues to satisfy their interest expenses. If the symptom persists, Transcorp could spiral back into the dark old days of frequent losses.

A coverage ratio measures how many times over a company could pay its current interest payment with its available earnings. Transcorp also owes about N4.9 billion in taxes.

The conglomerate giant issued bonds to finance its copious expansion plan increasing loans year on year by about N10 billion.  Recall the company launched a N10 billion bond issue to provide complementary finance for the upgrade of the company’s flagship Hotel, Transcorp Hilton Abuja, and construction of a multipurpose banquet centre. Most of these loans were foreign denominated and could also throw some of its projections for the new hotels in jeopardy.

Transcorp currently has about N21 billion in retained earnings and could further reduce if losses persists. Companies need to have retained earnings to be able to pay dividends.


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