By Akintola Omigbodun
We featured in this column last week the first part of a consideration of the 2012 annual report and accounts of FBN Holdings Plc, FBNH. Our primary conclusion is that FBNH is under-performing. We then asked the question, why is the recovery of FBNH slow post the 2008 market crash.
To justify the conclusion about FBNH’s performance, we shall look at results for two five-year cycles and probable results over a third 5-year cycle. The first five-year cycle is from the financial year ending March 2003 to the financial year ending March 2007. If one held 100 units of FBNH shares in January 2003, one would have earned N150 as gross dividend for the financial year ending March 2003. Gross dividend earnings for other year ends were N186 at March 2004, N216 at March 2005, N168 at March 2005 and N340 at March 2007. This gives a total dividend of N1060 for the 5-year period.
With the bonus shares declared during the period, 100 units of shares from January 2003 would have grown to 396 units of shares by August 2007. For an indication of share price, there was a rights issue in 2003 at a price less than N20 per share while there was a rights issue/offer in 2007 at N31/N33 per share.
The second five-year cycle is from the financial year ending March 2008 to the financial year ending December 2011. If one held 100 units of FBNH shares in say January 2008, one would have earned a gross dividend of N120 for the financial year ending March 2008, N168.75 for the financial year ending March 2009, N14.5 for the financial year ending December 2009, N97.8 for the financial year ending December 2010 and N130.4 for the financial year ending December 2011. This gives a total dividend of N531.45 for the five-year cycle. With the bonus shares declared during the period, 100 units of shares from January 2008 would have grown to 163 units of shares by April 2012.
The third five-year cycle is from the financial year ending December 2012 to the financial year ending December 2016. We assume that the directors of FBNH would retain an apparent policy of increasing the dividend per share by N0.20 from one year to the next year. If one held 100 units of FBNH shares in say September 2012, one would have earned a gross dividend of N100 for the financial year ending December 2012.
Dividends that would be earned for the other years in the cycle are N120 for the financial year ending 2013, N140 for the financial year ending December 2014, N160 for the financial year ending December 2015 and N180 for the financial year ending December 2016. This would give a total dividend of N700 for the five-year period. It is apparent that the level of earnings in this third 5-year period would not match the earnings in the 2003-2007 periods.
The 2012 annual report and accounts gives a summary of the risk management approach that is expected to make FBNH’s business model sustainable. The principal risks identified include credit risk, portfolio limit risk, market and liquidity risks, operational risk, information security risk, legal risk and compliance risk. However, one finds that a number of investments/projects require special attention. The Tejusosho Model Market in Lagos has not been completed although substantial deposits were obtained from prospective shop owners. The Rainbow Town project in Port Harcourt has problems of infrastructure amongst others.
The most significant investment FBNH has made in recent times is in Seawolf Oilfield Services Limited, otherwise called Seawolf. This investment has been at great risk and at a substantial loss to FBNH shareholders to date. FirstBank’s loan exposure to Seawolf was N99 billion at the time the Assets Management Corporation of Nigeria, AMCON, took over the loan at a discount of N11 billion. This loss of N11 billion by FBNH shareholders on this transaction has been described in FBNH documents as a haircut of the loan – a very expensive haircut indeed!
Seawolf’s results for the financial year ending December 2012 show a loss although its loan has been reduced to N88 billion. Also, its liabilities exceed assets by N22.4 billion. Great enterprise is sometimes at great risk but when things go wrong there should be an appropriate response. The directors of FBNH should be able to say when Seawolf is expected to show a profit and the exit strategy from this investment.
Venture capital is usually applied to get a company started and nurtured to a position where the company is profitable. Other shareholders would then be found for the company at this stage at a value that should give a profit to the persons who provided the initial capital for the company. First principles would however dictate that any investment in Nigeria that relies on loans at the current high interest rates over a long-term would struggle to make a decent profit.