TRANSNATIONAL CORPORATION OF NIGERIA PLC: Challenges in operational environment dampen top and bottom line earnings
Transnational Corporation of Nigeria Plc (Transcorp) is a leading diversified conglomerate. The company focuses on acquiring and managing strategic businesses that create long term shareholders’ returns and socio-economic impact. Its business interests are in four strategic sectors: Power, Energy, Hospitality and Agriculture. Notable businesses in the company include the award-winning Transcorp Hilton Hotel, Abuja; Transcorp Hotels, Calabar; Teragro Commodities Limited, operator of Teragro Benfruit Plant – Nigeria’s first-ofits-kind juice concentrate plant; Transcorp Ughelli Power Limited which acquired Ughelli Power Plc, owner of the 972MW Ughelli Power Plant and Transcorp Energy Limited, operator of OPL 281. The Company recently released its first quarter results for the period ended March 31st 2015 showing sluggish performance during the quarter as revenue and earnings declined when compared with the corresponding period of 2014 due to a number of macroeconomic factors.
MODEST DECLINE IN REVENUE DUE TO REDUCED OCCUPANCY RATE, ACUTE GAS SHORTAGES
The Group posted a modest decline of 5.16% in turnover to N9.92 billion in March 2015 from N10.54 billion in the corresponding period of 2014. The decline in turnover was driven by the reduced contribution from the Group’s Power business (Transcorp Ughelli Power Limited) and Hospitality business (Transcorp Hotels Plc). In particular, the conglomerates hospitality business suffered a decline of 22.02% in revenue to N3.22 billion from N4.12 billion over the period, due to reduced occupancy at its flagship Transcorp Hilton Hotels Plc. In specific terms, acute gas shortages during the quarter restricted the production capacity of the power plant. Also, the heightened political and security challenges in the country in the run up to the general elections resulted in significant reduction in occupancy rate at Transcorp Hilton, Abuja. Increase in costs of sales highlights higher gas prices, direct overheads Despite the sluggish gross earnings performance, cost of sales increased significantly by 50.60% to N4.29 billion in March 2015 from N2.85 billion in March 2014. The higher increase in the costs of sales may not be unconnected to the increased gas prices, despite the acute shortages, at its Ughelli Power plant among other factors during the period. Expectedly, due to the increase in cost of sales, the company reported a decline in gross profit to N5.70 billion in March 2015 from N7.69 billion achieved in 2014 and reflecting a significant decline of 25.82%. The high cost of sales however translated to a reduction in the gross profit margin to 57.07% from 72.96% over the period.
REDUCTION IN NET INCOME ATTRIBUTABLE TO INCREASED FINANCE COST
Operating profit for the period under review declined by 19.13% to N3.78 billion from N4.67 billion in the corresponding period of 2014. Net finance charge increased by a significant 33.73% to N1.21 billion in March 2015 from N904m billion in the corresponding period in 2014. The significant increase in the net finance charge was spurred by a 32.28% in finance cost to N1.46 billion in March 2015 from N1.10 billion over the period due to high overdraft and other debt obligations of the Group. The Group increased short term borrowing to N11.19 billion in the financial period of 2015, up 12.03% from N10.64 billion in the prior year. Finance income, on the other hand, rose by 25.68% to N250m from N199m in the corresponding period in 2014. In addition, the Group sustained a net other gain of N654m from a net other loss of N437m in the prior year. This represents in large part fair value gains on debt and equities securities held by the Group during the period. The increase in finance cost, in addition to the other factors, resulted in a 31.82% decline in the company’s profit before tax to N2.57 billion compared to N3.77 billion in the corresponding period of 2014. This translated to the significant reduction in the pre-tax margin to 25.72% compared to 35.78% in the prior year. Taxation expenses for the year reduced by 38.95% to N376m from N617m in the corresponding period of 2014. This resulted in a 30.42% decline in net income for the period ended March 2015 to N2.19 billion from N3.15 billion in the prior period of 2014.
MODEST INCREASE IN FINANCIAL LIABILITIES
For the period ended 31st March 2015, the conglomerate recorded significant growth in total liabilities by 4.16% to N84.37 billion from N81.00 billion in the prior year. The significant increase is attributable to the increased borrowing of the group to finance the operations of the power business (Transcorp Ughelli Power Limited). In particular, the 12.03% increase in short term borrowing to N11.92 billion during the year is of importance in this regard. Non-current liabilities of the company also increased modestly by 1.35% to N49.39 billion from N48.73 billion in the corresponding period of 2014. The modest reduction in the Group’s term loan by 1.35% to N37.80 billion from N37.14 billion in the prior year is notable.
NOTABLE EXPANSION IN TOTAL ASSETS; SURGE IN INVENTORIES AND CASH
The company’s total assets grew by 3.26% to N176.32 billion in March 2015 from N170.76 billion in the corresponding period of 2014. The growth in assets was due to a substantial growth of 13.64% in current assets to N40.92 billion from N36.01 billion over the corresponding period of 2014. This was caused largely by notable 54.06% increase in inventories to N2.59 billion in 2015 compared to the prior year and the 106.14% increase in cash and cash equivalent to N6.05 billion in March 2015. However, as a result of the decline in net income to the Group, Return on Assets (ROA) declined to 1.24% in March 2015 from 1.85% in the corresponding period in 2014. Return on Equity (ROE) also declined to 2.39% from 3.51% in the corresponding period of 2014.
BUY RECOMMENDATION RETAINED
We expect the hospitability chain to continue to contribute substantially to the group’s earnings as the security sentiments in the country improves during the year. In addition, expected improvement in gas supply should support the lucrative TUPL on the strength of continuing recovery of capacity and the industry fee structure. We believe that the on-going CAPEX in business segments’ expansion, possible full implementation of the Transition Electricity Market (TEM) in 2015 and continuing truthfulness of the management of the Group to its business plan would support continuing top line and bottom line growth in the next months. Based on the above developments, we maintain our earlier project revenue and net income projection of N52.49 billion and N7.87 billion respectively, leading to an EPS of N0.20 for the year. Therefore using an industry price to earnings multiple of 21.67x, we arrived at a 9-month price target of N4.33 per share. We therefore retain a BUY recommendation on Transnational Company of Nigeria Plc.