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Ugodre talks Figures: Is this the time to buy Transcorp Shares?

The company to the best of my knowledge has probably never declared dividends.

In the hey days of President Obasanjo, the government announced a grand plan to support the setting up of an indigenous Nigerian company which will attract global and local capital, using it to invest in world class businesses in Nigeria and Africa.

The company was well publicized and heralded as a truly Nigerian Enterprise for Nigerians and owned by Nigerians. Shares in the company were made public soon after and even yours sincerely invested patriotically. Several years afterwards the company has found itself in deep losses, scandals and a whopping decimation of its value. However, in 2011 the company witnessed a change of board and management as banking mogul, Tony Elumelu effectively took over the company through his Heirs Holdings Investment vehicle. Just over a year later and the company is notably climbing its way back up. But can their recent success line up the pockets of Investors? Let’s attempt to find out.

Turnover

Being a holding company, its major revenue stream is expected to come from dividends. Income has therefore mostly remained at an average of N2.6b over the years. 2011 was about N2.8b from N2.38b in 2010. I project their revenue to grow in the next couple of years following the company’s recently strategic acquisitions. Just a few weeks ago, President Jonathan commissioned a juice making factory in Benue state which the company has significant interest in. This is also on the back of their recently re-acquired oil block which was hitherto cancelled by the Government. Transcorp has also begun the process of winding down moribund subsidiaries which contribute nothing more than losses to the company.

Operating Profit

The company in its 2011 Annual Financial Statements announced Operational Profits before Interest and Tax of N1.39b an 88% increase from the N744.8m in 2010. The company has also seen an impressive rise in operational profit in the prior years as the table below shows;

2011 2010 2009 2008 2007

Turnover

2,833,333 2,382,396 2,785,717 2,561,652 3,067,072

Operating Profit

1,399,179 744,815 2,104,700 (876,037) (1,372,087)

Note: figures in N’000

The growth in operating profit for the company can be attributed to strong dividend revenue (the only income stream of the company as it is a Holdco) and a significant cut in cost over the last 2years. Admin and General Expenses dropped from N1.7b in 2010 to N1.45b in 2011. Still a long way to go as 2009 was N1.43b even though it was N3.4b and N4.4b in 2008 and 2007 respectively.

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Loans and Finance Cost

The company has also been able to shed off huge debts obtained in its formative years as loans reduced from almost N65b in 2007 to just about N2.26b in 2011. The impact of the reduction in loans can be seen in the finance cost for the last 5 years outlined below. It has dropped to about N260m from the highs of N5.4b recorded in 2007.

2011 2010 2009 2008 2007

Net Finance Cost

(259,754) (137,053) (2,043,882) (4,534,201) (5,496,333)

Profit after tax

Profit after tax for the year ended December 2011 was N777m, a significant increase compared to the N475m recorded in 2010 (if you discard the Exceptional Items). Though impressive and a sign of a steady return to profitability, it still represents a significantly small return on investment. With a balance sheet investment of N20.7b the N77m only provides a paltry 3.7% return on investment. This is still their best showing yet when you consider that the previous years have been a mixture of losses and near zero returns on investments.

Is it time to buy

For me, the decision to buy or sell Transcorp shares is greatly hampered by its inability to declare dividends in years to come. The company to the best of my knowledge has probably never declared dividends. Currently, it has a negative revenue reserve of N25.7b which means it may take the company 26years to pay dividends if its profit after tax were to be a constant N1b annually. That surely puts even a long term investor like me away not to talk of a short term investor. Is it possible for the company to make up this negative reserves within the next few years? surely! but nothing on ground suggests that. Most Investments in their portfolio also happen to be in industries notable for high competition and major players, making any suggestion of an astronomical growth all the more unrealistic.

Light in the Tunnel?

Transcorp under a new management is possibly the greatest asset the company has for now. The young and vibrant team with the able leadership of Tony Elumelu are probably best suited to turn the company around. However, a lot will depend on their ability to take radical and brave decisions that will ensure turning the company around not just through good investment decisions but through addressing the immediate need of wiping out the negative reserves. One method may be to net off the reserves against Capital via a Reduction of Share Capital. This is an uncommon territory in Nigerian especially if it does not involve a merger, takeover etc. However, the company can explore Section 106 subsection 2b of the Company and Allied Matters Act (CAMA) which says “A company may either with or without extinguishing or reducing liability on any of its shares, cancel any paid up share capital which is lost or unrepresented by available assets”. If the company can prove that the N25b in losses (negative reserves) is not represented by any assets and is not encumbered by liabilities then the company can effectively cancel it from its share capital giving it an opportunity to pay dividends when it declares profit again. The company’s share capital and premium is about N39.9b which effectively covers the losses of N25b. Whether this option is feasible or not is worth the try which is why I explained that a radical strategic decision is required to make investors smile. I would rather lose 90% of the nominal value of my investment to receive some form of dividends rather than hold on to 100% and never get any. Investors who bought their public offer have already suffered massive losses in the value of the shares, and as such giving them a window to get some form of returns no matter how small is commendable.

Finally

Transcorp currently trades just above 50kobo, previously hitting a year high of 63kobo. This is way down from their initial public offering price of over N3. The decision to buy therefore largely depends on investor confidence in the new management and their ability to patiently wait for uhuru. For me, it’s a precarious situation as selling will portend a massive loss and keeping is basically tantamount to keeping a barren chick.

See financials here and here. You can also get more here.

Visit Ugo’s blog HERE.

Editor’s note: Op-ed pieces and contributions are the opinions of the writers only and do not represent the opinions of Y!/YNaija.

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