…Management signifies early recovery 

By Emeka Anaeto,  Economy Editor

THE dynamics of stock trading in the Nigerian Stock Exchange, NSE, appears adverse to several stocks caught up in the nation’s economic headwinds. Such stocks as Transnational Corporation of Nigeria Plc, Transcorp, have, consequently, witnessed heavy bear run in most trading sessions, especially following adverse financial results.

Recently Transcorp along with several other companies announced negative results in their third quarter, 2016 (Q3’16) reflecting the adverse operating environment. But some fundamentals of the company’s performance show some good spots. Moreover, the future appears bright going by some management information.

Despite the harsh operating environment, sales were up by 37.7 per cent to N41.9 billion as all segments continue to contribute to top lines. Growth in revenue compared with Q3 2015 is higher than the inflation rate.

Financing activities

However, while sales grew substantially, a foreign exchange loss on financing activities of N18.45 billion undermined the bottom line and hence the company reported a loss after tax of N14.02 billion compared to a profit of N5.9 billion the previous year. Difficulty in accessing foreign currency affected the plan to convert the USDollar denominated loan to local currency.

Against the backdrop of a seriously bruised bottom line is the burden of short-term loans showing a heavily geared operation. This burden appeared to have undermined its ability to meet interest expense as its interest coverage ratio of 0.46 times earnings is lower than the 1.5 per cent threshold.

This is clearly evident in the huge jump in finance costs by 424.4 per cent to N25.15 billion as reported in its Q3’16, just as debt to capital ratio stood at staggering 130.2 per cent, indicating an over-dependence on debt capital.

Tony Elumelu

The other concern is in rising cost of operation totally outside inflationary pressures. Transcorp recorded a 78.5 per cent increase in cost of sales in the period under review. Cost of sales grew faster than revenue on account of higher input cost. Some industry observers believe this is partly attributable to difficulty in obtaining local gas to run factories.

The subsidiaries have their share of good and bad fortune. Generating capacity for Transcorp Power Limited declined significantly as a result of the deteriorating gas supply situation and load restrictions from the national grid. But the hospitality business remained resilient. There was increase in trade and other receivables on account of huge receivables from the Nigeria Bulk Electricity Trading Plc (NBET), during the period.

Further on the investor-scare is the fact that Transcorp has a zero dividend yield as the huge loss position would hinder it from paying dividends to investors. When this is factored in the adverse stock pricing the company had faced this year becomes a fait accompli.

Consequently, Year-to-Date, YtD, returns to investors worsened, deteriorating to -43.9 per cent from -33.8 per cent recorded just before the Q3’16 result was announced.

But that is not all the news. The company’s management appears to be on a confident drive out of the woods.

Management Pulse

In response to inquiries by Vanguard the management said the huge drop in profit was due to losses it incurred on foreign currency (FX) loan arising from devaluation of Naira.

On the continued losses from this FX exposure the management stated: “We expect this to be resolved in the near term subject to influx of liquidity in FX market. We have in principle commitments with our lenders to convert the loan to NGN facility. We are actively working to raise FX liquidity to support this conversion but are generally limited by market conditions for now”.

The management also clarified that the seeming huge drop in profit was in relation to the 2015 baseline figures which show non-recurring income in 2015 compared to 2016.

Dividend income

These include dividend income from listed equities portfolio and liquidation dividend from Nitel.

On worries expressed by some analysts over the increasing “Trade and other receivables” on account of Nigeria Bulk Electricity Trading Plc, the management sees the problem being resolved by government soonest based on  expected disbursement of balance of Nigerian Electricity Market Stabilisation Facility (NEMSF) fund from the Central Bank of Nigeria, CBN.

The total fund is N213 billion but we do not know how much of it would be going to Transcorp’s electricity business.

The management also said it was expecting liquidity defreeze from the planned secondary intervention of the federal government through raising bonds to retire industry receivables, while good news would also be coming from the push to move all industry players to activation of industry agreements which trigger payment guarantees to reduce receivables.

Priority allocation

Other good news from Transcorp includes its strategic repositioning in the power sector where its subsidiary, Transcorp Power Limited, indicated bright prospect for improved generating capacity.

In response to Vanguard inquiries in respect of this the management stated: “We expect to increase available capacity from 533mw to 775mw following introduction of new turbines of 100megawatts each; work closely with our existing suppliers to get gas on a priority basis; Close liaison with NPDC/NGC for priority allocation of available gas.

“This has led to a 340% recovery of gas supply from a low daily generation of 70mw in June 2016 to average generation of 308mw between June to October 2016. Generation peaked at 470mw in September”.