The Nation Newspaper

Category: Equities

  • What new horizon for GSK?

    GlaxoSmithKline Consumer Nigeria (GSK Nigeria) Plc has been at the centre of the stock market transactions in recent period. The global deal between GlaxoSmithKline, United Kingdom, (GSK UK) Plc, the majority foreign core investor in GSK Nigeria and Suntory Beverage and Food Limited, an ambitious Japanese drinks company, appears to excite investors but it also has wider implications. Capital Market Editor, Taofik Salako reports that GSK is stepping into a new horizon with larger opportunities but also potential threats

     

     

     

    GlaxoSmithKline Consumer Nigeria (GSK Nigeria) Plc fluctuates between gains and losses, underscoring differing investors’ perspectives of the future of the leading healthcare company. GlaxoSmithKline, United Kingdom (GSK UK) Plc, the foreign majority core investor in GSK Nigeria, had last Monday announced the global sale of its Lucozade and Ribena drinks to Japanese company, Suntory Beverage & Food (SBF) Limited in a deal valued at £1.35 billion, about $2.1 billion. The deal, which is awaiting final approval by European regulators, is expected to be completed by the end of 2013. The two brands-Lucozade and Ribena, are iconic and popular brands with Nigerian consumers and while GSK Nigeria has a large portfolio of pharmaceutical and consumer healthcare products, Lucozade and Ribena accounted for more than 50 per cent of the group sales and operating profit in 2012. GSK Nigeria has two distinctive business categories- pharmaceuticals and consumer healthcare. Pharmaceuticals consist of prescription drugs and vaccines while consumer healthcare segment consists of oral care, over-the-counter medicines and nutritional products. With some of Nigeria’s iconic brands such as Macleans toothpaste, Panadol brand of paracetamol and then Lucozade and Ribena variants, GSK Nigeria relies heavily on its consumer healthcare business. In the last audited report ended December 31, 2012, consumer healthcare products accounted for N17.878 billion in sales, 70.6 per cent of group turnover of N25.308 billion. Pharmaceuticals segment accounted for N7.430 billion, 29.4 per cent of group total sales. Lucozade and Ribena, which sales grew by 26 per cent during the year, were both the main drivers for the consumer healthcare business and the group’s total sales, accounting for more than 70 per cent in each instance.

    The announcement of the global sale came with a much-awaited confirmation- that GSK Nigeria will retain the exclusive rights to the Lucozade and Ribena. Throughout the controversial bid by GSK UK to increase its majority equity stake GSK Nigeria earlier this year, the right to produce and market the Lucozade and Ribena drink brands for the Nigerian and other African markets was the pawn on the chessboard of the aborted transaction. Investors has since waited with baited breathe as GSK Nigeria rounded off discussions with GSK UK on retaining the rights to the Lucozade and Ribena. The board of GSK Nigeria has confirmed that the company will continue to bottle and distribute Lucozade and Ribena for Suntory. According to the company, GSK Nigeria has agreed the terms of an exclusive contract under which SBF will supply certain ingredients of Lucozade and Ribena, with effect from January 1, 2014. The company also assured that it remains within its profit forecast for the ongoing business year ending December 31, 2013. Besides, it noted that the full financial impact of the new arrangement with SBF will be phased in between 2014 – 2015 with possible marginal decline in GSK Nigeria’s overall long term operating margin by some three to four percentage points. It wasn’t overkill.

    Investors responded positively to the sale agreement. GSK Nigeria’s share price recorded the highest gain of N3.20 on Monday to close at N67.20 per share, playing a contrarian stock in a market that was pervaded by losses by several highly capitalised stocks. The stock market’s average price index had indicated a decline of 0.08 per cent. Whatever happens to GSK Nigeria is important to the Nigerian stock market. The most capitalised stock and highest-priced stock in the healthcare sector, GSK Nigeria opens today with market capitalisation of N61.23 billion, more than 82 per cent of the total market capitalisation of the the 10 stocks in the sector. Total market value of the healthcare sector stands at N74.66 billion. GSK Nigeria is the blue-chip representative of the healthcare sector in the exclusive list of dominant stocks at the NSE. It ranks within the top 30 stocks, a group of stocks that largely determine the overall market direction.

     

    A win-win deal?

     

    Last week’s announcement opens a new vista for GSK Nigeria, it brings into the company additional strategic partner. While GSK UK, which holds majority equity stake of 46.4 per cent in GSK Nigeria, retains its interests, Suntory views GSK Nigeria as a springboard for an ambitious African expansion. This opens up prospects of additional strategic growth initiatives, products and supports for GSK Nigeria. SBF is a major food and beverage company. It held 20 per cent share of Japan’s non-alcoholic drink market in 2012. SBF is reported to have amassed a war chest of some ¥500 billion, about $5 billion, for takeovers and expansions after it successfully held Japan’s largest initial public offering this year. Suntory Beverage has said it plans to acquire companies in Southeast Asia, Middle East, Africa and Latin America to help double sales to ¥2.0 trillion by 2020. The Tokyo-based company derived about 31 per cent of group turnover from overseas markets in 2012 compared with 25 per cent in 2011, according to data compiled by Bloomberg. SBF views the GSK deal as a major linchpin in its expansion strategy. According to SBF, the GSK deal will allow it to expand in countries where GSK already operates including Nigeria and Malaysia. Chief executive officer, Suntory Beverage and Food (SBF), Nobuhiro Torii said the company aims at 5.0 per cent annual sales growth in Lucozade and Ribena, which it expects to provide “stable profits”. SBF almost doubled 2013 first-half net income to ¥12 billion on the back of increased cost efficiency and sales growth in Asia. With the mind on African market, SBF’s eyes are firmly fixed on GSK Nigeria, which has proven consistently o surpass growth targets on both Lucozade and Ribena. Such strategic relationship holds prospects for additional funding, new products, increased global affiliation and further diversification of GSK Nigeria’s growth base, thus insulating the company to some extent from the utter shock of franchise realignment and negative spillovers from global restructurings and acquisitions. SBF had bought 51 per cent of PepsiCo Inc (PEP)’s soft-drink business in Vietnam earlier this year. It had in 2009 bought France’s Orangina Schweppes Group for ¥300 billion and New Zealand’s Frucor Beverages Group for €600 million. SBF, which held 20 per cent share of Japan’s non-alcoholic drink market in 2012, the second-biggest after Coca-Cola Co’s 28 per cent, will likely give desired focus to Lucozade and Ribena. Lucozade and Ribena had combined sales of about £500 million in 2012. That sales prospects now belongs to Suntory, in addition to GSK’s Coleford manufacturing site. SBF may also want expand the global sale of its Boss coffee brand, especially in Nigeria which has a large market for coffee. In learning the curves, it is also unlikely that SBF’s parent company-Suntory Holdings, which sells whiskey and beer, may explore opportunities in Nigeria’s large whiskey and beer market, thus further cementing the group’s interests in Nigeria.

    Besides, global products portfolio restructuring is expected to increase GSK UK, UK’s biggest drugmaker, focus on its main pharmaceuticals business. GSK UK has earmarked to sell some older products to enhance its bigger business of developing new medicines. It plans to use the proceeds from the sale of Lucozade and Ribena to partly deleverage its balance sheet. Nigeria is a large market for prescriptive drugs and vaccines. With the renewed focus, GSK UK will want to give additional push to its prescriptive drugs’ market share in Nigeria. Both partners-GSK UK and SBF, thus bring additional peps to GSK Nigeria.

     

    Inconclusive deal

     

    But the potential risks are that of conflict of interest of the strategic partners and ability of GSK Nigeria to develop well-suited business streams that enamour drug-aggressive GSK UK and drink-aggressive SBF. Many multinationals have opted to divest from their Nigerian subsidiaries because of global products realignment and restructuring. However, many other new global acquirers have also strengthened their Nigerian subsidiaries and affiliates. The long-term outlook for GSK UK’s business and equity interests in GSK Nigeria is still evolving. Although the GSK UK-SBF-GSK Nigeria’s deal on Lucozade and Ribena suggests a positive closure of one of potential threats to GSK Nigeria’s future standing, the negotiation appears to have just started. With its renewed global focus on prescriptive medicines, GSK UK will also aim to streamline its global network and enhance this in line with the demand of the drug business. It will need to be convinced that GSK Nigeria, with its dominant consumer healthcare business, can provide a stronger and competitive platform to achieve sales and profit targets. Pearson, UK recently divested its shareholdings in Longman Nigeria Plc, which subsequently changed to Learn Africa Plc, because of its global products realignment and concern that its Nigerian affiliate was not well-suited for its new business focus. In the healthcare sector, the restrictive and ethical nature of prescriptive drugs and vaccines sometimes provides disconcerted multinationals with incentives to go private without any considerable adverse impact on their Nigerian operations. Pfizer sold its equity and pulled out exclusive rights from Neimeth International Pharmaceuticals but the multinational has remained active in the domestic drug market.

    GSK UK had rested the argument for its push for a dominant controlling equity stake in GSK Nigeria on its future ambition to invest substantially and further develop the Nigerian subsidiary. Nigerian shareholders and other investors had in July rejected GSK UK’s ambitious share purchase bid aimed at increasing its shareholdings in GSK Nigeria to 75 per cent. GSK, which currently holds majority equity stake of 46.4 per cent GSK Nigeria, holds 443.91 million shares of GSK Nigeria’s current outstanding shares of 956.70 million ordinary shares of 50 kobo each while other investors hold the balance of 512.79 million shares. GSK UK had pushed to acquire 273.46 million ordinary shares out of the other shareholders’ holdings to add 28.58 per cent to push its post-acquisition holding to 75 per cent. It offered N48 per share. According to the proposal, GSK UK would acquire additional shares of GSK Nigeria on a pro rata basis from existing shareholders, implying that the proportionate percentage will be deducted from all other shareholders and added to GSK UK. Other shareholders had protested vehemently against the offer price and the element of compulsion, forcing the multinational to step down the acquisition bid. Nigerian shareholders were also concerned about the prospects of their future shareholdings. With 75 per cent equity stake, GSK UK will be able to push through any future major changes including mergers and acquisition, delisting, shares buy back, changing of public limited liability status, new capital issues and restructuring among others. Extant Nigerian laws require 75 per cent shareholdings to approve such major changes. In recommending the aborted transaction, the board of GSK Nigeria had reasoned that increased GSK ownership underlines GSK’s long term support of GSK Nigeria’s strategy. The board said it unanimously believed that the proposal was in the best interest of the continued growth of the GSK Nigeria, the shareholders, employees, customers, the community and Nigeria. According to directors of the company, increased equity stake will encourage GSK UK to make new substantial investments in the Nigerian subsidiary.

    In announcing the withdrawal, Chairman, GlaxoSmithKline Consumer Nigeria (GSK Nigeria) Plc, Chief Olusegun Osunkeye, told the scheduled court-ordered meeting of shareholders that GSK decided to step down the acquisition bid to consider appropriate amendments that will make the offer more acceptable to shareholders. At a media parley after indefinite suspension of the court-ordered meeting, Osunkeye explained further that GSK UK and GSK Nigeria were ready to renegotiate everything and come up with a win-win transaction that would be beneficial to all stakeholders. According to him, the company will go back to the drawing board to work out a fair and persuasive deal that offers better price and remove element of compulsory purchase of shareholders’ holdings. He said while the company would be anxious to return with a new proposal, it would not put a timeline for the new deal. Both GSK UK and GSK Nigeria have since not made any announcement on the comeback bid, which leaves an open-ended question on future relationship. There is also future possibility, no matter how remote, of SBF seeking equity interests in GSK Nigeria, to gain some sort of control on the management of its Nigerian market.

    Investors only need to worry about the future; consumers are oblivious of the changes in the company. GSK Nigeria’s financials have continued to show steady growth. Half-year report ended June 30, 2013 showed group sales of N14.0 billion as against N12.85 billion recorded in comparable period of 2012. Profit before tax increased to N2.1 billion as against N1.9 billion while profit after tax improved from N1.3 billion to N1.4 billion. Audited report for the year ended December 31, 2012 had shown a turnover of N25.31 billion and profit before tax of N4.17 billion. The strong wind of change can propel GSK Nigeria hither and thither, the future of the healthcare leader lies in stringing up acceptable deals that consolidate its pharmaceuticals business without jeorpardising its booming consumer healthcare.

     

  • Costain’s directors mull restructuring over losses, corporate failures

    -Equities in mild rally with 0.43% weekly gain

    Directors of Costain (West Africa) Plc are scheduled to meet next week to consider decisive measures to be taken to rescue the ailing construction company.

    Regulatory filing obtained by The Nation indicated that the main agenda at the meeting is consideration of urgent measures to be taken to halt the downspin and resuscitate the struggling 65 years old construction company.

    According to the report, directors of Costain would deliberate on possible restructuring strategies, the wobbling financial position of the company and its consistent failure to meet prerequisite post-listing and disclosure requirements.

    The first construction to be listed on the Nigerian Stock Exchange (NSE), Costain has struggled with streak of losses and poor corporate compliance records over the years. The NSE imposed a sanction of N2.85 million on the company for failure to submit its 2011 audited report within the timeline, a similar situation that led to higher fine of N3.6 million for the 2012 audited report. It was also fined N575, 505 for failure to obtain the necessary approval from the NSE before announcing the appointment of an external auditor.

    Latest audited report and accounts for the year ended March 31, 2012 showed a generally negative performance outlook. With declining sales, increasing losses and negative working capital, significant erosion of the net assets had heightened concerns about the prospects of the construction company.

    Total turnover dropped from N9.20 billion in 2011 to N7.39 billion. Total cost of sales and administrative expenses stood at N9.11 billion in 2012 as against N8.39 billion in 2011, setting the background for the huge increase in loss before tax from N880.82 million to N1.93 billion. Loss after tax rose to N1.85 billion in 2012 compared with N1.25 billion in 2011. On this, each ordinary share carried a loss of N1.71 in 2012 as against N1.15 in 2011. With this, shareholders’ funds dropped by N1.93 billion from N6.61 billion to N4.68 billion. This implied reduction in net assets per share from N6.10 to N4.32. The company struggled with a negative working capital of N1.10 billion in 2012 as against N1.02 billion in 2011.

    The latest report, though worse, followed similar fundamental pattern since 2008. For numerous shareholders that had bought into the company’s message of restructuring and turnaround in 2007, it’s not only the recent losses that count but the unyielding depreciation that has taken over a company which they bought into its corporate message of turnaround and public offer at N13 per share.

    With the emergence of Shoreline Energy International Limited as the new core investor in Costain, the company had floated a combined rights and public offer in December 2007 with a view to raise N8.04 billion. Nearly three-quarters of the shares were offered to pre-qualified existing shareholders under the rights issue at a discount of N11 per share. New investors paid N13 per share to buy into the public offer. As the application lists closed, investors had watched eagerly as their share price hit a high of N26.55 per share by the end of January 2008. But between 2008 and now, shareholders have lost on both counts. With no dividend whatsoever, Costain’s share price opens today at N1.22 per share.

    Meanwhile, turnover at the NSE last week stood at 1.14 billion shares worth N14.13 billion in 24,122 deals. The financial services sector topped the activity chart with 704.56 million shares valued at N5.99 billion in 13,362 deals. The trio of Transnational Corporation of Nigeria Plc, Arbico Plc and Guaranty Trust Bank Plc were the most active stocks with combined turnover of 334.613 million shares worth N2.602 billion in 2,434 deals, about 29.4 per cent of aggregate turnover volume during the week.

    In spite of the downtrend that dominated trading sessions, the overall market position still retained some growth. The All Share Index (ASI), the value-based index that tracks all equities on the NSE, recorded a week-on-week gain of 0.43 per cent to close at 36,403.95 points as against its week’s opening position of 36,248.53 points. Aggregate market capitalization of all equities also increased from value-on-board of N11.497 trillion to close at N11.591 trillion, reflecting marginal capital gains and supplementary listing of shares by Ecobank Transnational Incorporated (ETI).

    A total of 3.125 billion ordinary shares of 50 kobo each were added to the outstanding shares of ETI following the completion of the special placement by ETI to Public Investment Corporation of South Africa.

     

  • Will Conoil sustain the lead?

    Will Conoil sustain the lead?

    Conoil opens today with the highest current earnings yield in the oil and gas sector. With the highest profit growth in the first half, Conoil leads largely impressive fundamentals in the downstream oil industry. Capital Markets Editor, Taofik Salako, reports that the current outlook signposts possible returns

    Quoted oil and gas companies are split between the two extremes- positive and negative. Current operational fundamentals and related technical indicators at the stock market show clear resurgence within the first group of stocks and a slowdown in the second group of stocks. Three of the six oil majors recorded significant improvement in the bottom-line while three others witnessed contraction in the first half ended June 30, 2013. The same scenario played out in the pricing trends of oil and gas stocks at the stock market, although at a lesser degree.

    The All Share Index (ASI), the benchmark index that tracks all equities on the Nigerian Stock Exchange (NSE), opens today with eight-month year-to-date return of 29.10 per cent. The sector-specific NSE Oil and Gas Index trails with a return of 24.71 per cent. Year-to-date returns by most oil and gas stocks surpass market’s average return. Forte Oil posts a year-to-date return of 402.8 per cent. MRS Oil and Gas opens with 52.1 per cent. Conoil carries average year-to-date return of 45.4 per cent. Total Nigeria trails with 30.3 per cent while Mobil Oil Nigeria shows the least positive return of 2.5 per cent.

    Earnings yield- a forward-looking indicator that relates fundamental earnings to share price, provides a bridge between corporate earnings and share pricing trend. While the year-to-date return and latest operational fundamentals illustrate the historic returns by a stock, earnings yield underlines the potential return and intrinsic value in a stock. Earnings yield is calculated by finding the percentage of current net earnings per share of a stock to the current share price at the stock market, to determine the probable underlying yield for the stock. Besides its importance as a measure of intrinsic returns, earnings yield also denotes probable cash dividend range given its unique feature as a ratio of basic earnings per share. Earnings per share represents net profit earned by every outstanding share of a company within a period. The board, subject to approval of the shareholders at a general meeting, will then decide on the amount of dividend to be paid from the earnings per share. For companies with long-established dividend payment policy, probable dividend could be deduced on the basis of current earnings per share.

     

    Growing profit

    While downstream oil companies continue to struggle with slow top-line, most companies made appreciable growth in profitability in the first half. Interim results and accounts for the six-month period ended June 30, 2013 showed almost sector-wide improvement in margins, which underpinned substantial growths in actual pre and post tax profits. While Mobil Oil’s sales dropped by 9.0 per cent, profits before and after tax grew by 73 per cent and 74 per cent respectively. MRS Oil and Gas optimized its 20 per cent growth in sales into 44 per cent increase in net earnings, although its pre-tax margin still showed hangover of previous reversal. Forte Oil grew sales by 20.7 per cent and cut down on midline costs to grow pre and post tax profits by 56.5 per cent and 62.7 per cent respectively. Oando struggled all through with declines in sales and profit while Total Nigeria failed to turn its marginal sales growth of 7.0 per cent into profit growth as pre and post tax profits dropped by 7.0 per cent and 9.0 per cent respectively.

    Conoil’s performance stood out within the period. Key extracts of the interim report and accounts of Conoil showed that the downstream oil company drew on improved cost management to optimize marginal growth in sales. While turnover grew marginally by 4.5 per cent, profit before tax jumped by 198.6 per cent while profit after tax leapt by 254.8 per cent. Profit before tax closed June 2013 at N1.98 billion as against N663.1 million recorded in comparable period of 2012. Profit after tax leapt to N1.6 billion compared with N450.9 million, underlining similar increase in earnings per share from 65 kobo to N2.30. Gross profit rose from N7.73 billion to N8.33 billion. Turnover had risen slightly to N79.6 billion in 2013 as against N76.2 billion by June 2012.

    The report underlined significant improvement in the profit-making capacity of the company. While gross profit margin improved from 10.14 per cent to 10.46 per cent, pre-tax margin quadrupled to 2.49 per cent in 2013 as against 0.87 per cent in corresponding period of 2012. The bottom-line shows a robust outlook for the shareholders of the company, which had announced a dividend per share of N1 for the 2012 business year. First half’s net earnings in 2013 already indicated the company could double such dividend.

     

    Pricing the earnings

    Current earnings yields, based on the first half performance, indicate an average yield of 4.59 per cent for the oil and gas sector. Conoil opens today atop the table with a yield of 7.72 per cent. Oando follows with a yield of 5.89 per cent. Total Nigeria indicates a yield of 4.52 per cent. Mobil Oil Nigeria carries a yield of 4.11 per cent. Forte Oil implies a yield of 3.32 per cent while MRS Oil and Gas carries a yield of 2.0 per cent. Annualized, the half-year-based current earnings yield shows out Conoil with the highest full-year yield of more than 15 per cent.

     

    Management forecasts

    Management of Conoil has indicated it would consolidate its first half performance during the second half. According to the directors of the oil-marketing company, full year profit could rise to about N4 billion by the end of this year. On the basis of this management guidance, earnings per share could rise to N5.76 by the year ended December 31, 2013. This implies earnings yield of 19.3 per cent on the opening share price today.

    Management of the company said they expected to drive the second half performance with projected 65 per cent revenue increase from its nationwide retail outlets, especially newly commissioned mega stations. Performance is also expected to be augmented by additional income streams from new lubricant products launched earlier in the year as well as expected 72 per cent increase in probable revenue from the fully-deregulated lubricant business. With its new production plant in Port Harcourt, Conoil plans to step up engine oil exports to West African markets as well as enter into joint venture partnerships with leading car manufacturing companies for the use of Conoil lubricants in their vehicle engines. It also expects additional incomes from ancillary services including marketing of Low Pour Fuel Oil (LPFO) and Bitumen, which were reactivated in the first half of 2013 and are expected to boost sales in the second half.

    While it expects to sustain its lead as the market leader in the aviation business, the company plans to grow its Liquefied Petroleum Gas (LPG) business by expanding the distribution networks and deploying innovative marketing strategies.

    “For us, the downstream remains fundamentally attractive now and for the medium to long term. With our clarity of direction and focus, our company’s long-term success is assured. We will sustain our improved performance and realize our aspiration to become the leading petroleum products marketer and one of the most profitable quoted companies. We will consistently pursue initiatives that will enable our brands, processes and people drive our corporate vision and ultimately drive value for our shareholders,” the company stated in a response to analyst’s request on forecasts.

    According to Conoil, it has strengthened and repositioned its core businesses with huge investments in retail network expansion, which involved building multi-million Naira mega stations across the country as part of efforts to demonstrate its long-term growth strategy in the industry.

    “Our half year strong performance prepares us well for the increasingly fierce competition in the industry. We will continue to transform our business and the way we interact with our dynamic marketplace. We will continue to benchmark our company against the best global standards and practices to ensure that the business is managed in the best interest of all stakeholders. Fresh initiatives to strengthen our income base in the core segments of the business will be pursued pro-actively capitalizing on every emerging opportunity in the sector,” the company stated.

    Will Conoil be able to sustain its growth? The operating environment in the Nigerian downstream oil sector remains tough and uncertain. With distortions from partial deregulation, sustained performance in the sector requires aggressive and sustainable sales strategy, given that sales growth is the major driver of long-term profitability. The decisive differentiating factors in the sector thus are long-term investments in key facilities including storage and blending facilities, supportive and farsighted board with strong financial influence, dynamic management and sound local intelligence. Conoil, with its single-minded focus on the downstream business, has laid strong foundation with recent investments in capacity expansion and continuing sales growth strategies. The overall outlook appears closer than farther to the management guidance for the full-year.

     

  • SEC searches capital market for Boko Haram’s funds, launderers

    Securities and Exchange Commission (SEC) at the weekend directed all capital market operators to review their data base and check for any transactions involving entities and individuals related to proscribed extremist groups, especially Borno-based ‘Boko Haram’.

    In two circulars to all capital market operators obtained by The Nation, the apex capital market regulator directed all capital market operators to combine dual search on their transaction details to ensure compliance with proscription orders on some persons and organisations and also global and national anti-money laundering laws.

    The directives imply a financial system-wide review of transactions. Market operators include stockbroking firms, issuing houses, fund managers, custodians, trustees, and investment advisory firms, share registration companies, corporate secretaries, depository, securities exchange, venture capital, receiving bankers and underwriters among others.

    According to SEC, operators are expected to submit their findings to the Commission immediately.

    SEC noted that operators are bound to comply with resolutions of the United Nations Security Council Resolution (UNSCR) 1988, which requires all member states to freeze, without delay, all funds, other financial assets and economic resources in their territories, owned or controlled, directly or indirectly by individuals and or entities associated with the Afghanistan group-Taliban.

    “You are therefore requested to review your records to ascertain whether the listed persons and entities have any business relationship with your organization. If they do, such business relationship must be discontinued and a report rendered to the Nigerian Financial Intelligence Unit (NFIU) immediately vides email and surface mail. Reports rendered should include attempted, unconcluded and concluded transactions. Where there are no such business transactions, nil returns should be rendered to the Director, NFIU monthly,” SEC stated.

    It added that operators must constantly visit the updated United Nations Sanctions list and cross-check this with their customer database to ensure that Nigerian capital market operators do not unwittingly conduct business with the designated persons or entities and their associates.

    SEC noted that the Federal Government has proscribed the activities of the Northern-based extremist group, ‘Boko Haram’, otherwise known as Jamaatu Ahlis-Sunna Liddaawati Wal Jihad and Jama’atu Ansarul Muslimina Fi Biladis Sudan in any part of the country, warning operators that they are bound to report any transaction related to the groups.

    “All capital market operators are by this letter required to check their database for the names “Jamaatu Ahlis-Sunna Liddaawati Wal Jihad” otherwise known as “Boko Haram” sect and “Jama’atu Ansarul Muslimina Fi Biladis Sudan” as well as their associations and report same to the Securities and Exchange Commission. Where no business relationship is maintained for any of the proscribed names or their associations, a nil return should be rendered,” the apex regulator stated.

    SEC also directed operators to study the new requirements under its amended rules and regulations on money laundering and conduct a database search to ensure they are fully compliant with the new provisions.

    Director -General, Securities and Exchange Commission (SEC) Ms Arunma Oteh had recently inaugurated Committee of Chief Compliance Officers in the capital market with the primary responsibility of preventing the injection of illegal funds or proceeds of criminal acts into the capital market.

    According to her, the chief compliance officers would ensure that the operations of the capital market are undertaken in line with regulatory guidelines as the market’s regulators and operators continue to strengthen existing frameworks.

    She noted that integrity of the financial system is the mainstay of the system and Nigeria must endeavour to develop adequate frameworks and processes that will support its aspiration of a world-class capital market.

     

  • Will power plant recharge Transcorp?

    The acquisition of 972-megawatts Ughelli power plant last week by Transnational Corporation of Nigeria (Transcorp) Plc turned investors’ attention to the loud, low-priced stock. Transcorp was the most active stock but the dithering on its share price underscored underlying fears about the conglomerate. Capital Market Editor Taofik Salako reports

     

    Transnational Corporation of Nigeria (Transcorp) Plc emerged the most active stock on the Nigerian Stock Exchange (NSE) last week, contributing about 11.45 per cent of aggregate turnover during the week.

    Transcorp recorded a turnover of 127.63 million shares valued at N163.51 million in 697 deals, about 98.5 per cent of total turnover volume of 129.62 million shares worth N223.10 million traded in 961 deals in the conglomerates sector. Total turnover stood at 1.12 billion shares valued at N12.94 billion in 24,489 deals.

    As news made the round that Transcorp, alongside other bidders, had completed the acquisition of unbundled power plants, investors rushed shares of Transcorp, the only quoted company and publicly available window to participate in the privatisation of the power sector. Transcorp, through its subsidiary, Transcorp Ughelli Power Limited (TUPL), last Wednesday completed acquisition of Ughelli power plant with the payment of $225 million to complete the $300 million bid price for the power plant. Transcorp had earlier made initial payment of $75 million, being required 25 per cent initial payment by bid winner. On Thursday, Transcorp was the most active stock and recorded more than 27 per cent of its weekly turnover volume as investors staked N45.29 million on 34.87 million shares in 215 deals. The scramble also nudged the share price by 8.13 per cent to N1.33, a significant increase when compared with stock market’s average return of -0.60 per cent on Thursday.

    In the second trading session after the formal announcement and the last trading day for the week, Transcorp sustained as the most active stock but with less transactions and at lower value. It recorded a turnover of 27.04 million shares valued at N34.86 million in 164 deals. Most investors appeared unwilling to place a premium on the stock, forcing the share price to drop by 2.26 per cent to N1.30, the same value it had started the week. Against the average weekly decline of 1.11 per cent for the stock market, Transcorp’s flat performance might appear considerable. However, for a conglomerate that had just closed a much-sought after power sector deal, it belies the significance of the transaction.

     

    Power in the group

    Transcorp is the anchor company in the Transcorp consortium, which included companies such as Wood Rock; Symbion Power LLC, USA; Medea Development; PSL Engineering and Control and Thomassen Services and Contracting Company. With installed capacity of 972 megawatts, current generating capacity of 300 megawatts and potential output of 1070 megawatts, the Ugheli power plant thickens the basket of the conglomerate’s businesses in strategic sectors including Transcorp Hilton Hotel, Abuja; Transcorp Hotels, Calabar; Teragro Commodities Limited and Transcorp Energy Limited, operator of OPL 281. Power, upstream oil, hospitality and agriculture; the combination of businesses and sectors appear to make for a robust outlook, given the synergies in these fastest growing and dominant sectors of the Nigerian economy. Often cited in relation to the boom in the telecommunications sector, most analysts perceive the power firms as cash cows that would not only generate power but significant returns for investors. The monopolistic nature of the system and centrality of the success of the privatisation to government’s transformation agenda confer enormous advantages on the power companies. But such enthusiasm is not reflecting on the market consideration of the conglomerate at the stock market, the best indicator to gauge public perception. This is more evident given that Transcorp holds the distinction as the only publicly quoted company with a pie of the power sector.

     

    Long road to redemption

    Transcorp appears to still wriggle in the lurking ghosts of previous failed promises and dashed hopes. For most non-insider investors in Transcorp, it has been a long waiting for any form of return or recuperation-cash dividend, bonus share or capital appreciation. Incorporated in 2004, Transcorp was touted as the next frontier of African investment and Nigeria’s investment vehicle in the global economy. Its vision was to become the largest and most successful Africa-based conglomerate while the mission was to drive Africa’s integration into the global economy by becoming a Nigerian-based multi-national conglomerate with between $5 billion and $10 billion annual revenue and market capitalisation of between $30 billion and $60 billion within five to seven years. As a conglomerate, Transcorp’s interests span agriculture, energy, real estate, hospitality and trade and commerce. All these were woven around enticing returns to shareholders.

    Nearly a decade after it raised several billions of Naira from investors with a promise to be the pride of shareholders, Transcorp is still yet to find neither the fundamental stability nor the technical appreciation to deliver any commensurate return. After a railroaded application and waiver that exempted Transcorp from the required minimum operational years and audited accounts, the conglomerate was listed in November 2006. The share price leapt from a low of N6 per share to close the year at a high of N9.71. However, realities soon set in. Transcorp closed 2007 at N3.14 per share, seven kobo above its lowest market consideration of N3.07 during the period. Thus, rather than the high hopes of a global multinational return, Transcorp returned full-year loss of 67.7 per cent to shareholders in its first full year on the stock market.

    By the time the entire capital market caught the cold from global financial and economic crises and domestic assets bubble in 2008, Transcorp had stripped to nominal value. In 2010, the conglomerate spiraled from a high of 57 kobo to close at a low of 50 kobo. In 2011, Transcorp traded within a range of a high of N1.82 and a low of 50 kobo and subsequently closed at 57 kobo per share. It however made an impressive return of 84.2 per cent to close 2012 at N1.05 per share. At opening price of N1.30 today, Transcorp carries a year-to-date return of 23.8 per cent, some six percentage points below market’s average return of 30.27 per cent.

     

    In search of stable fundamentals

    Transcorp recovery is also related to changes in the fundamentals of the company. Transcorp had posted a loss of N9.1 billion within the eight-month period ended December 2006. In 2007, loss after tax stood at N8.93 billion while investors contended with net loss of N6.70 billion in 2008. It broke the cycle in 2009 with a net profit of N1.2 billion. Latest audited report of Transcorp for the year ended December 31, 2012 showed that net profit after tax slumped by 56.8 per cent from N5.86 billion in 2011 to N2.53 billion in 2012. The decline depressed earnings per share from 7.74 kobo to 4.38 kobo. The report showed a top-down negative performance with marginal decline in sales magnified down the line by external and internal costs. Turnover dropped slightly from N13.90 billion to N13.24 billion. Gross profit slipped from N10.44 billion to N9.77 billion while operating profit dropped from N4.59 billion to N3.76 billion. Substantial increase in interest income moderated equally significant increase in interest expense, mitigating the adverse impact of the conglomerate’s huge debt exposure. Finance income jumped from N276.67 million to N1.04 billion while finance cost rose from N261.32 million to N860.25 million. With these, profit before tax dropped from N4.61 billion in 2011 to N3.95 billion in 2012. Half-year report for the period ended June 30, 2013 however showed strong potential for improved performance. Turnover stood at N7.85 billion while profits before and after tax closed the period at N3.61 billion and N2.48 billion respectively. Earnings per share thus stood at 5.53 kobo. This represents earnings yield of 4.25 per cent against the current market price. This highlights possible fundamental return outlook for the company.

     

    Deepening the growth

    Besides the acquisition of the Ugheli power plant, Transcorp has recently undertaken several strategic initiatives to enable stable growth. Transcorp recently concluded a rights issue of 12.91 billion ordinary shares of 50 kobo each at N1 per share. The net proceeds of the rights issue estimated at N12.52 billion was scheduled mainly to refinance the loan taken to acquire the Ughelli power plant. About 79 per cent of the net proceeds amounting to N9.84 billion would be used to refinance Ughelli Power. The conglomerate would use N1.63 billion, 13 per cent of net proceeds, for exploration and development of its oil block, Oil Prospecting Licence (OPL) 281. The balance of N1.05 billion, representing eight per cent of net proceeds, would be used to develop new hotels Port Harcourt and Lagos; in order to boost the conglomerate’s hospitality business in the South-South and South-West of Nigeria.

    Transcorp is also pushing for growth on other frontiers. It had revised the terms of partnership in its Oil Processing License 281 (OPL 281) in Nigeria. The revised terms were said to be as a result of a change of control in Transcorp as the conglomerate sought to fully take responsibility for the operation of the block in its bid to become a leading Nigerian indigenous oil and gas upstream company with production.

    Speaking on prospects of the conglomerate, Chairman, Transnational Corporation of Nigeria (Transcorp) Plc Mr Tony Elumelu said conglomerate’s power business would create long-term social and economic values for all stakeholders. According to him, the conglomerate would leverage on the successful acquisition to consolidate its growth strategy in Nigeria’s power sector.

    “We can now embark fully on our strategy to contribute to the development of Nigeria’s power sector, whilst creating long term economic and social value for our stakeholders and the greater community. We fully expect our engagement on this world-class project to improve the living standards of all Nigerians as well as impact positively on our country’s GDP,” Elumelu said.

    The management of the conglomerate also shared this optimism.President, Transnational Corporation of Nigeria (Transcorp) Plc Mr Obinna Ufudo said TUPL has extensive worldwide power sector experience in Africa, Europe and the Middle East which underscores its unquestionable capacity to effectively manage the plant profitably in line with international standards.

    According to him, the conglomerate plans to increase the power generation of the plant from 300 megawatts to more than 1070 megawatts over the next five years.

    Chief Executive Officer, Transcorp Ughelli Power Limited (TUPL) Adeoye Fadeyibi added that the company plans to deliver on capacity targets and sustain the momentum using highly efficient people and resources to achieve operational excellence.

    But beyond the immediate optimism and back-slapping of the new acquisition, Transcorp requires tangible and demonstrable returns to win investors’ confidence and bring the intrinsic values in its several businesses to bear on its share price.

     

     

  • Govt, stakeholders work on roadmap for listing telecoms

    The Federal Government and other stakeholders have started discussions on a roadmap that would lead to listing of the telecoms companies on the Nigerian Stock Exchange (NSE) as part of efforts to support the development of the stock market.

    Coordinating Minister of the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala and the Minister of Communications Technology, Mrs. Omobola Johnson, spoke on efforts by government to ensure major companies in key sectors of the economy list their shares on the NSE during a visit to the stock exchange at the weekend.

    Mrs Okonjo-Iweala said government has intensified efforts to get more companies, especially those in the telecoms and oil and gas sectors to be listed on the NSE.

    According to her, the government shares the vision of making Nigerian stock market the premier stock exchange for Africa.

    She said stock market must develop in tandem with national economic growth noting that as Nigerian economy overtakes other economies, the stock market should also become the main market for the continent.

    Mrs Johnson outlined that discussions were ongoing on the roadmap for the listing of telecoms companies noting that most telecoms appreciate the need to list their shares on the NSE.

    “We have had very good discussions with the telecoms companies; they understand why they should list. What we are doing now is to prepare the plan for them to list because there are a number of things that need to be sorted out; these are very large companies. I think the difference here is that we have a plan and we would work that plan to ensure that we get the telecoms companies to list,” mrs Johnson said.

    She restated the support of her Ministry for the Securities and Exchange Commission (SEC) and the NSE in their quest to bring the Nigeria capital market to where it was meant to be.

    She assured that efforts had gone beyond just calls for more companies to be listed as ongoing plan is being driven through collaboration of many stakeholders.

    “We have spoken a lot about the technology and I am so impressed with the amount of technology I see here today. It has been a tremendous improvement. The other reason that I am here is to bring more companies unto the stock exchange. The information and communication industry contributes 8.5 per cent to GDP, it is the fastest growing sector of the economy and we need to ensure that companies in the sector are listed on the stock exchange,” Omobola said.

    Okonjo-Iweala said that although market operators and regulators still have a lot to do to bring the market to its pride of place, government would remain key supporter of efforts to develop the market.

    “You have been and you are a key pillar of the Nigerian Economy. Different studies have shown that the way and the direction the stock market goes is very predictive for the rest of the economy and that is why this administration is very supportive of what you have done,” Okonjo-Iweala said.

    She said the government had demonstrated its resolve by standing by the market during the recent recession noting that government gave forbearance to margin traders and also took measures to eliminate capital gains and VAT taxes, which are currently being put into the gazette prior to implementation.

    President, Nigerian Stock Exchange (NSE), Alhaji Aliko Dangote, said stakeholders were anticipating the listing of the firms in the ICT industry because of the sector’s contribution to the national economy.

    He said the visit by the Ministers was a proof that the government was fully in support of the stock exchange.

    Responding on behalf of the stockbrokers, Doyen of the brokers and chief executive officer, Trust Yield Securities Limited, Mr. Ola Yussuf, commended the Ministers for their supports.

     

     

     

     

     

     

  • What makes difference in conglomerates?

    Returns within the conglomerates sector are equally split-positive and negative. Even within the positive side only UAC of Nigeria (UACN) outperforms stock market’s average return. Taofik Salako locates the returns and pricing trends of the conglomerates within the fundamentals of the companies

     

    When an investor buys into a conglomerate, he buys into a large basket of businesses. That is where the advantage lies for conglomerates but paradoxically, that’s also the disadvantage too.

    Conglomerates are, particularly, named because of the several distinct businesses they combine under a single business name. A conglomerate may be involved in nearly every sector of the economy as well as each chain of production. For the six quoted conglomerates, their interests span the whole gamut of the economy from manufacturing to automobile, real estate, hotel, general trade and merchandise, power, agriculture and services among other sectors.

    Either within a conglomerate or the large sectoral group, an investor will find any sector he wishes to invest in. AG Leventis (Nigeria) Plc, John Holt Plc, Scoa Nigeria Plc, Chellarams Plc, UAC of Nigeria (UACN) Plc and Transnational Corporation of Nigeria (Transcorp) Plc; all have nothing less than eight business lines that run through the entire gamut of the economy.

    Investors look to above-average returns from conglomerates and somewhat steady fundamental performances that defy the difficulties in the operating environment. The assumption of diversity reinforces this optimism- the deficiencies in one sector are evened out and moderated by opportunities in another sector. But the challenges of managing intricacies of several business interests, especially the potential risks of overlapping costs, transfer of value-chain inefficiencies and group cover for segmental weaknesses among others can set up a conglomerate for failure, in spite of the large size. These underline the continuing structural changes and realignments within the sectors. All the surviving conglomerates have undergone several large business reengineering and restructuring exercises and many, such as UACN and Transcorp, are still pruning and refocusing their businesses into what they considered as high-margin segments.

     

    Facts of the businesses

    Both technical and fundamental reports of conglomerates also appear to show the diversity and degree of returns within the sector. The All Share Index (ASI), the main index that tracks prices of all quoted equities on the Nigerian Stock Exchange (NSE), opens today with average year-to-date return of 30.05 per cent. This theoretically implies that an average investor, whose portfolio mirrors the entire market, would have made about 30 per cent return on investment as at the market opening today. While it may be practically difficult to build a perfect mirror of the market, the common index serves the purpose of peer review and benchmark. The ASI highlights the pervading downtrend in the conglomerate sector. With three conglomerates with negative year-to-date returns, only one of the three other conglomerates is trading above the market average. John Holts opens today with the sector’s worst year-to-date return of -65.9 per cent. Chellarams follows with -22.8 per cent while Scoa Nigeria dithers with -1.85 per cent. On the upside, AG Leventis opens with a modest return of 14.1 per cent. Transcorp performs better with 23.8 per cent. UACN stands out as the only stock with above average return at 47.4 per cent.

    Market price, it’s generally agreed, relates the fundamentals of a stock. Although market pundits may differ about timeline for price correction, market sensitivity to information, disclosures and other variables that make for immediate pricing efficiency, there is a consensus that the market will always adjust the stock price to reflect the fundamental value. The fundamentals of most conglomerates belie the longstanding maxim of diversity in strength, and for most of the stocks, the stock market pricing efficiency hypothesis holds true.

    Latest audited and interim earnings reports of the conglomerates showed striking similarities of downtrend, with the exception of UACN, which appears to have found a winning formula for steady growth. Audited report and accounts of Transcorp for the year ended December 31, 2012 showed that it suffered a major reversal as sluggish sales compounded high costs to shave off more than N3.3 billion from the net profit of the conglomerate. Net profit after tax slumped by 56.8 per cent from N5.86 billion in 2011 to N2.53 billion in 2012. The decline depressed earnings per share from 7.74 kobo to 4.38 kobo. The report showed a top-down negative performance as marginal decline in sales was magnified down the line by external and internal costs. Turnover dropped slightly from N13.90 billion to N13.24 billion. Gross profit slipped from N10.44 billion to N9.77 billion while operating profit dropped from N4.59 billion to N3.76 billion. Substantial increase in interest income moderated equally significant increase in interest expense, mitigating the adverse impact of the conglomerate’s huge debt exposure. Finance income jumped from N276.67 million to N1.04 billion while finance cost rose from N261.32 million to N860.25 million. With these, profit before tax dropped from N4.61 billion in 2011 to N3.95 billion in 2012. Transcorp has not paid any dividend since it was incorporated.

    AG Leventis showed similar performance, although it sustained its unbroken dividend payment record. Turnover dropped by 10 per cent from N18.10 billion in 2011 to N16.30 billion in 2012. Profit before tax declined by 21 per cent to N652.85 million as against N823.53 million while profit after tax dropped by 14 per cent from N328.64 million in 2011 to N284.17 million in 2012. It however retained dividend per share of 14 kobo, the same rate distributed in previous year.

    Chellarams’ audited report for the year ended March 31, 2013 indicated that net profit slumped by 54.6 per cent from N251.16 million to N113.93 million. Profit before tax had dropped from N378.89 million in 2012 to N241.32 million in 2013. The top-line was sluggish with decline in total sales from N25 billion to N23.31 billion.

    John Holt has continued to writhe in losses with a loss before tax of N1.8 billion for the year ended September 30, 2012. It had posted a pre-tax loss of N1.94 billion in 2011. Turnover dropped by 53.5 per cent from N5.93 billion in 2011 to N2.76 billion in 2012. After exceptional items, it however made a profit after tax of N424 million in 2012 as against net loss of N1.57 billion in 2011.

    Both full-year audited and interim reports of Scoa Nigeria showed the conglomerate’s continuing struggle with costs. Audited report for the full-year ended December 31, 2012 showed that sales rose from N3.84 billion in 2011 to N6.19 billion in 2012. Profit before tax also increased from N148.28 million to N164.31 million. Profit after tax however dropped from N101.27 million to N73.41 million, a drop of 27.5 per cent. The depressing bottom-line was more evident in the first half of this year. While turnover rose modestly from N3.17 billion in first half 2012 to zN3.21 billion in 2013, profit before tax halved from N127.72 million in 2012 to N59.67 million in 2013. Profit after tax dropped by 53.3 per cent from N89.40 million to N41.77 million in 2013.

     

    Exceptional performance

    In line with its exceptional above-average stock market return, UACN Group has shown equally exceptional performance within the conglomerate sector. Audited and interim reports of the five quoted companies that formed the nucleus of the UACN Group-UACN, UACN Property Development Company (UPDC) Plc, CAP Plc, Portland Paints and Products Plc and Livestock Feeds Plc have shown consistent growths in turnover and profit period-on-period. Emerging results for the first half ended June 30, 2013 showed that UACN grew sales by about 24 per cent and further optimized costs to deliver higher growths of 50.5 per cent and 33.9 per cent in profits before and after tax respectively. UPDC followed the same pattern, turning 22 per cent growth in turnover into 138 per cent and 137 per cent increase in profit before tax and profit after tax respectively.

    UACN’s turnover rose to N37.71 billion in first half of 2013 as against N30.50 recorded in comparable period of 2012. Profit before tax jumped from N3.47 billion to N5.22 billion. Profit after tax also increased from N2.14 billion in 2012 to N3.44 billion in 2013. With these, earnings per share increased to N1.69 in first half 2013 compared with N1.24 recorded in corresponding period of 2012.

    UPDC grew earnings per share by 137 per cent from 44.5 kobo in first half of 2012 to N1.07 in first half 2013. Turnover rose from N5.19 billion to N6.32 billion. Profit before tax more than doubled to N1.62 billion as against N683 million in comparable period of previous year. Profit after tax also rose from N616.88 million to N1.46 billion.

    CAP showed modest but steady performance with turnover of the paints and allied company increasing by 14 per cent from N2.53 billion to N2.88 billion. Profit before tax inched up by 7.0 per cent to N909.6 million compared with N849.3 million. Profit after tax followed the same trend at N618.5 million in 2013 compared with N577.5 million in 2012. Livestock Feeds was also upbeat with profit before tax of N95.21 million in first half 2013, 20 per cent above N79.39 million recorded in comparable period of 2012. Profit after tax also improved from N57 million to N64.75 million. Turnover had risen by 10 per cent from N2.47 billion in 2012 to N2.70 billion in 2013.

    Portland Paints, which UACN completed acquisition of 51 per cent of its equities in June 2013, is the only struggling member of the group. Portland Paints’ first quarter report ended March 31, 2013 showed that sales dropped to N624.85 million as against N832.22 million recorded in comparable period of 2012. Profit before tax slumped from N110.33 million to N29.55 million while profit after tax declined from N75.02 million to N20.1 million. UACN paid and completed acquisition of Portland Paints on June 28, 2013.

    The first-half reports showed continuing improvements in the market share and profitability of the conglomerate. Audited report and accounts of UACN for the year ended December 31, 2012 had shown that sales rose by about 17 per cent, but increasingly efficient top-down cost management leapfrogged net profit by 108 per cent. The improvement in profitability reflected on actual dividends to shareholders with cash dividend of N1.60 per share in addition to a scrip issue of 20 per cent. UACN’s total sales increased by 16.8 per cent from N59.64 billion in 2011 to N69.63 billion in 2012. Gross profit thus increased by 20 per cent from N15.86 billion to N19.05 billion. Profit before tax leapt by 54 per cent from N6.99 billion to N10.75 billion. After taxes, net profit for the year doubled from N3.41 billion to N7.10 billion. Group’s earnings analysis indicated earnings per share of N4.44 in 2012, more than double of N2.13 recorded in 2011. Net assets per share also improved from N35.64 to N37.85.

    Audited report and accounts of UPDC for the year ended December 31, 2012 had also shown that turnover rose by 78 per cent to N12.04 billion as against N6.78 billion in 2011. Profit before tax stood at N2.45 billion as against N2.40 billion in previous year. Profit after tax rose by 30.5 per cent from N1.67 billion to N2.18 billion. Shareholders of the company received dividend of N962.5 million, representing a dividend per share of 70 kobo.

    Similarly, audited report and accounts of CAP for the year ended December 31, 2012 had shown turnover of N5.23 billion in 2012 as against N4.31 billion in 2011. Profit before tax rose from N1.36 billion to N1.66 billion while profit after tax increased to N1.12 billion as against N1.05 billion in previous year. Earnings per share closed 2012 at N1.99 compared with N1.87 in 2011. CAP paid final dividend of N392 million, representing 70 kobo per share. The company had paid interim dividend of 125 kobo per share earlier in November 2012, bringing total dividend for 2012 business year to N1.092 billion or N1.95 per share. In addition, it distributed bonus issue of one ordinary share of 50k each for every four ordinary shares of 50k each.

    Sustaining the performance

    Group Managing Director, UAC of Nigeria Mr Larry Ettah has outlined a six-point agenda for the second half of the year to consolidate the performance of the conglomerate and opening up new growth opportunities.

    According to him, the conglomerate will focus on tackling margin challenges across key categories as well as integration of the new acquisitions to leverage on the synergies and benefits of the group. He said the group would also complete capacity expansion of its grand cereals plant. In furtherance of its refocusing strategy, UACN will also consolidate on existing partnerships which have seen foreign equity investments in two of its unquoted subsidiaries.

    “We have announced a series of transactions that advance our strategic agenda. We are on course to conclude the remaining transactions for the year, pursue our integration plan for the new acquisitions and work with our strategic partners to strengthen our brands and sustain leading positions in our markets. We aim to translate those leading positions to leading performance and generate competitive returns for our shareholders,” Ettah said in a strategic preview of the second half.

    While most other conglomerates have kept their turnaround and growth strategies to their chests, it appears that definitive focus on growth areas and the additional corporate governance discipline of its quoted subsidiaries make the difference for UACN.

     

  • What bull points for UBA?

    What bull points for UBA?

    United Bank for Africa (UBA) Plc was apparently the toast of the investing public last week. With largest turnover in the market and highest gain in the banking subsector, UBA was a contrarian stock in the generally negative market situation. Taofik Salako reports on the undercurrents drumming the upbeat for the bank

    Equities fell all through last week. From the opening trading session to the closing deals, the market was a bear market. At the end of the week, the All Share Index (ASI), the value-based index that serves as the common gauge for the Nigerian stock market, indicated a week-on-week return of -1.0 per cent. This depressed average year-to-date return to 35.47 per cent. With all sectoral indices on the negative, the downtrend was pervasive. The NSE 30 Index, which tracks the dominant 30 most capitalised stocks on the Nigerian Stock Exchange (NSE), dropped by 1.09 per cent, illustrating the losses suffered by most highly capitalised stocks. The NSE Banking Index, which tracks the dominant banking subsector, indicated a weekly return of -0.32 per cent. Other indices-the NSE Consumer Goods Index, NSE Insurance Index, NSE Oil and Gas Index, NSE-Lotus Islamic Index, NSE Industrial Goods Index and NSE-ASeM Index dropped by 0.93 per cent, 0.89 per cent, 1.01 per cent, 1.66 per cent, 3.64 per cent and 0.35 per cent respectively.

    Amidst the downtrend, UBA stood out as a contrarian stock. With a three-day capital gain of 7.80 per cent, it doubled as the highest gainer, in percentage terms, in the banking subsector and one of the top 10 gainers last week. UBA’s share price rose from its price-on-board of N7.82 to close the week at N8.43 per share. Interestingly, UBA’s upwardly pricing trend has been simultaneous with large turnover. UBA was the most active stock both within the banking subgroup and the entire market. UBA’s turnover of 170.96 million shares accounted for 27.5 per cent of turnover in the banking subsector and 15.6 per cent of total turnover for the week. Banking subsector, it should be noted, altogether accounted for 56.65 per cent of aggregate turnover on the NSE last week.

    Market dynamics

    The three scenarios- the bearish overall market situation, UBA’s upwardly pricing trend and large volume, underline a favourable perception for UBA. Technically, volume is a wave breaker for pricing trend except where the demand exceedingly overwhelms supply. Where there are more investors willing to buy at premium than investors willing to sell, higher price becomes a bait to attract volume and vice versa. All things being equal, sustained large volume with sustained capital appreciation is an indication of strong prospects. As profit takers turn in their shares to lock in their capital gains, more futuristic investors round up the supply and up the demand to elicit further supply. Suffice to note that on the NSE, like other markets, price movement-either up or down, is dependent of possession of minimum volume of shares. Thus, price appreciation occurs where the selling investor and the buying investor- through their stockbrokers, agreed on the premium value of the stock and vice versa. That explains why a bearish market is regarded as a buyer’s market- because the interest of the buyer is to purchase at a lower price, and a bullish market is referred to as a seller’s market, since the interest of the seller is to sell at premium.

    Underlying fundamentals

    UBA’s upbeat came on the heels of the release of the half-year earnings report of the bank. One of the five reports so far from the banking subsector, UBA’s six-month report came out fairly better than average industry performance. Interim report and accounts of UBA for the first half ended June 30, 2013 showed gross earnings of N125.98 billion as against N107.91 billion recorded in comparable period of 2012. Profit before tax increased from N30.41 billion to N33.25 billion. Profit after tax also improved from N27.07 billion to N28.41 billion. The report also showed appreciable improvements in the group’s balance sheet with deposits rising by 13.5 per cent from N1.77 trillion in 2012 to N2.01 trillion in 2013. Total assets increased to N2.42 trillion while net loans for the period amounted to N761.18 billion. Net assets grew by 7.9 per cent to N207.60 billion. The bank remained ahead of regulatory benchmarks in key indices with liquidity, adequacy and loan deposit ratios of 53.5 per cent, 22.3 per cent, and 37.7 per cent respectively.

    The latest earnings report illustrated continued growth, albeit at a steady pace, in the bank’s fundamentals. The bank had in the first quarter ended March 31, 2013 recorded a profit before tax of N17.2 billion as against N15.3 billion recorded in comparable period of 2012. Profit after tax grew by 19.1 per cent to N15.6billion as against N13.1 billion recorded in the corresponding period of 2012. Three-month gross earnings grew by 19.8 per cent, representing approximately N10.4billion additional revenue to the bank. Total deposits also improved by 13.5 per cent from N1.777 trillion by December 2012 to N2.017 trillion by March 2013. Total assets grew by 7.1 per cent to N2.434 trillion compared with N2.272 trillion in December 2012. Total equity grew by 8.8 per cent to N209.4 billion compared with N192.5 billion posted in comparable period of 2012.

    UBA’s 2013 performance appeared to illustrate the maturity of the growth trend of the company. After devastating provisions coloured the bottom-line red in 2011, the bank made impressive recovery in 2012. Audited report and accounts of the bank for the year ended December 31, 2012 showed profit before tax rose of N52 billion in 2012 compared with a loss of N26.60 billion in 2011. Total comprehensive income attributable to equity holders grew by 5,058 per cent to N55.53 billion compared with a loss of N1.12 billion in 2011. Gross earnings grew by 34.45 per cent to peak at N220.1 billion; representing approximately N56.40billion additional revenue on the N163.7 billion recorded in previous year.

    Analysts at Bismarck Rewane’s Financial Derivatives Company (FDC) said UBA’s 2013 half-year report was ‘solid’, referencing the underlining sentiments for the tier one bank.

     Management forecasts

    Group managing director, United Bank for Africa (UBA) Plc, Mr Phillips Oduoza, said the first half report showed the resilience of the bank given that it operated under the revised Central Bank of Nigeria (CBN)’s guideline on bank charges in the second quarter of the year.

    According to him, the results reflected continued improvement in asset quality; disciplined expense management and an articulated execution of the bank’s three-tier strategic plan.

    “The decisions we have taken so far are paying off, having recorded an improvement in revenue, as indicted in our guidance for the year. We were also encouraged by the growth in our Africa subsidiaries, which benefited from the strategic business alignment that has commenced. Thirteen of our 18 bank subsidiaries recorded profit in the first half of the year,” Oduoza outlined

    He said the bank has been well-positioned for growth based on its solid balance sheet footing, robust capital and liquidity positions noting that the bank would continue to benefit from the successful execution of quality relationship management process which is driving client acquisition and engagement.

    He said the bank would continue to harness new efficiency initiatives, increase lending to key growth sectors of the economy, continuously develop its platforms to sustain synergies among the bank’s African subsidiaries while identifying viable opportunities to leverage on its strong capital position and make the right investments in its business.

    “While economic growth remains modest, there are signs that business returns will be much better. Our customers are the reasons we are in business, and we will not relent on our efforts to seek new and innovative ways of delivering unique and value adding products to meet their banking needs,” Oduoza said.

    Bull and bear points

    Analysts at Afrinvest say the future of the Nigerian banking space will rest on ancillary banking services including merchant banking, primary mortgage institutions and retail and small and medium enterprises banking. According to analysts, the industry is now confronted with the reality of declining fee incomes, mobile money and dollar denominated capital sourcing. The Central Bank of Nigeria (CBN) had recently increased the cash reserve ratio for public sector funds to 50 per cent, undercutting the support base for several banks with large public sector funds. “The era of “real banking” appears to be gradually re-emerging as traditional sources of high income and profitability continue to come under threat from increased competition and tighter regulation,” analysts stated.

    With these operating challenges, banks with large geographic spread and cross-jurisdiction market as well as deep products and services portfolios will find stronger supports to mitigate adverse impact of operating changes. UBA appears to be in better stead. A pan-African financial services holding group with operations in 19 African countries and other major global financial centres, UBA could harness opportunities across the markets to sustain a steady performance. That appears to be the undertone for investors’ optimism on the bank.

     

     

  • What group advantage for UACN?

    What group advantage for UACN?

    Three companies within the UAC of Nigeria (UACN) Group released their first-half reports at the weekend. With strong growths by two larger companies-UACN, UPDC; the results showed a robust outlook for the conglomerate. Taofik Salako reports that results by other companies within the group may further shape the conglomerate’s outlook

    There is hardly any stock as influential as UAC of Nigeria (UACN) Plc and its subsidiaries. Obviously Nigeria’s largest and most active conglomerate, UACN Group comprises of five quoted companies spread across manufacturing, services, logistics, real estate and agricultural sectors of the Nigerian economy. The UACN Group includes- UACN, CAP Plc, UACN Property Development Company (UPDC) Plc, Livestock Feeds and Portland Paints and Products Plc. Besides the five quoted companies, other members of the group include UAC Foods Limited, MDS Logistics Limited, Warm Spring Waters Nigeria Limited, Grand Cereals Limited and Unico CPFA Limited.

    With a year-to-date return of 50 per cent, the market value of UACN has grown considerably this year. UACN opens today with nearly some 18 percentage points ahead of the average return at the stock market. The main index at the Nigerian Stock Exchange (NSE), the All Share Index (ASI), opens trading today with a year-to-date return of 32.29 per cent.

    UACN opens today at N63 per share, 50 per cent on its year’s opening value of N42. With a high of N71.10, the conglomerate has shown the strongest resilience this year. It had reached a high of N43.99 per share in 2012. UACN’s share price had traded between a range of N58.48 and N36.16 to close 2010 at N37.51. In 2011, the conglomerate pricing trend ranged between N42.50 and N28.70 before it closed at N31.18. But these recent periods have seen an increasingly resilient performance by the conglomerate and its major constituents. Viewed against full-year return of -16.9 per cent in 2011 and 34.7 per cent in 2012, the current year-to-date return signals major recovery for the stock.

     

    Stronger earnings

    The three quoted companies that formed the nucleus of the UACN Group-UACN, UPDC and CAP, at the weekend released their six-month reports for the first half ended June 30, 2013. The three companies sustained growths in turnover and profit, with remarkable improvements in the operations of UACN and UPDC, the two largest members of the group.

    UACN grew sales by about 24 per cent and further optimized costs to deliver higher growths of 50.5 per cent and 33.9 per cent in profits before and after tax respectively. UPDC followed the same pattern, turning 22 per cent growth in turnover into 138 per cent and 137 per cent increase in profit before tax and profit after tax respectively.

    UACN’s turnover rose to N37.71 billion in first half of 2013 as against N30.50 recorded in comparable period of 2012. Profit before tax jumped from N3.47 billion to N5.22 billion. Profit after tax also increased from N2.14 billion in 2012 to N3.44 billion in 2013. With these, earnings per share increased to N1.69 in first half 2013 compared with N1.24 recorded in corresponding period of 2012.

    UPDC grew earnings per share by 137 per cent from 44.5 kobo in first half of 2012 to N1.07 in first half 2013. Turnover rose from N5.19 billion to N6.32 billion. Profit before tax more than doubled to N1.62 billion as against N683 million in comparable period of previous year. Profit after tax also rose from N616.88 million to N1.46 billion.

    On the other hand, CAP showed modest but steady performance. Turnover of the paints and allied company increased by 14 per cent from N2.53 billion to N2.88 billion. Profit before tax inched up by 7.0 per cent to N909.6 million compared with N849.3 million. Profit after tax followed the same trend at N618.5 million in 2013 compared with N577.5 million in 2012.

     

    Consolidating the growth

    The first-half reports showed continuing improvements in the market share and profitability of the conglomerate. Audited report and accounts of UACN for the year ended December 31, 2012 had shown that sales rose by about 17 per cent, but increasingly efficient top-down cost management leapfrogged net profit by 108 per cent. The improvement in profitability reflected on actual dividends to shareholders with modest increase in cash dividend to N1.60 per share in addition to a scrip issue of 20 per cent. Actual profit and loss figures showed impressive top-down growths while underlying fundamental indices affirmed improvement in intrinsic profit-making capacity of the group. Gross profit margin improved from 26.6 per cent in 2011 to 27.4 per cent. Average profit before tax margin scaled up to 15.4 per cent compared with 11.7 per cent. Return on total assets improved from 5.8 per cent to 8.7 per cent while return on equity nearly doubled from 6.0 per cent to 11.7 per cent. Group’s total sales increased by 16.8 per cent from N59.64 billion in 2011 to N69.63 billion in 2012. Gross profit thus increased by 20 per cent from N15.86 billion to N19.05 billion. Profit before tax leapt by 54 per cent from N6.99 billion to N10.75 billion. After taxes, net profit for the year doubled from N3.41 billion to N7.10 billion. Group’s earnings analysis indicated earnings per share of N4.44 in 2012, more than double of N2.13 recorded in 2011. Net assets per share also improved from N35.64 to N37.85.

    Audited report and accounts of UPDC for the year ended December 31, 2012 had shown that turnover rose by 78 per cent to N12.04 billion as against N6.78 billion in 2011. Profit before tax stood at N2.45 billion as against N2.40 billion in previous year. Profit after tax rose by 30.5 per cent from N1.67 billion to N2.18 billion. Shareholders of the company received dividend of N962.5 million, representing a dividend per share of 70 kobo.

    In the same vein, audited report and accounts of CAP for the year ended December 31, 2012 had shown turnover of N5.23 billion in 2012 as against N4.31 billion in 2011. Profit before tax rose from N1.36 billion to N1.66 billion while profit after tax increased to N1.12 billion as against N1.05 billion in previous year. Earnings per share closed 2012 at N1.99 compared with N1.87 in 2011. CAP paid final dividend of N392 million, representing 70 kobo per share. The company had paid interim dividend of 125 kobo per share earlier in November 2012, bringing total dividend for 2012 business year to N1.092 billion or N1.95 per share. In addition, it distributed bonus issue of one ordinary share of 50k each for every four ordinary shares of 50k each.

     

    Strengthening the group

    UACN had recently concluded acquisition of two other quoted companies-Livestock Feeds and Portland Paints and Products Plc (Portland Paints). The acquisitions represented major market consolidations for the conglomerate, which already has significant interests in related businesses. The acquisitions are expected to deepen the conglomerate’s control in existing markets and create synergies for growth through larger scope and scale economies in procurement, production and distribution.

    The acquisition of Portland Paints will not only enhance the existing decorative paints portfolio of the UACN Group, but it also holds possibilities for new businesses. Besides its flagship brand-Sandtex, Portland Paints’ products include marine and protective coatings for oil and gas sector, sanitary ware, instant road repair material for repairs in all weather for cracks and potholes in asphalt, concrete and landing runway areas in airports as well as its traditional decorative and industrial paints. UACN, with its market-leading UPDC in the real estate sector, will find cost-saving synergies from other non-paint businesses of Portland Paints.

    Besides, the acquisition of Livestock Feeds is expected to substantially impact on the group’s market share and control in the agriculture sector, where it already has substantial investment. It is envisaged that the business combination with Livestock Feeds would lead to significant development of the agro-allied business industry, a key pivot of Nigeria’s drive for enhanced agricultural sector contribution to the national economy. The value propositions of the acquisition included the ability to create a new catalyst that would allow Livestock Feeds to penetrate new markets as well as deepen its presence in existing markets.

    Group managing director, UAC of Nigeria, Mr. Larry Ettah, believed recent initiatives would strengthen individual company and cumulate into better returns for the group. According to him, UPDC has been positioned to take advantage of the huge opportunities in the real estate sector with a view to enhance returns to shareholders. He outlined that the company has taken strategic initiatives to grow its business and ensure the benefits thereon get to the shareholders. He said the real estate company would continue to seek means of deleveraging its balance sheet with a view to secure improved returns for shareholders in the future.

    “The real estate sector continues to be attractive with the huge housing deficit of about 17 million units, the growing population and the emerging middle class. Partnership opportunities are also emerging across different segments of the market and your company is poised to take advantage of them,’’ Ettah said.

    He said CAP will combine plant efficiency with new innovations aimed at simultaneously improving customer’s satisfaction while enhancing profitability. According to him, with the support of its technical partners, CAP would continue to grow and reinforce its brand equity and its distribution channels will be geared towards reaching the under-served retail end by opening more Dulux Colour Shops to make the brand more accessible to the aspiring consumers across the country.

    “We will focus on, and invest in, plant efficiency to improve customer service delivery and reduce operational costs,’’ Ettah said.

    With its ability to even out sectoral shocks, UACN’s enlarged growth base holds strong potential. While it may be too early to pinpoint the actual synergistic values of its expansionary drives and the headwinds of costs also still remain threats, there are several incontrovertible macro variables that suggest some potential. First, agricultural businesses hold strong potential under government’s pro-farm fiscal policy. With several sector-specific intervention funds and fiscal concessions, UACN can leverage on government’s incentives to strengthen its internal productivity. The building and construction industry, with its allied sectors such as paints sector, is a buoyant sector with significant headroom for growth. Nigeria is not only below average housing target, its national infrastructure is inadequate. Growing as emerging economy will imply substantial growth in these areas. Besides, expected growth in mortgage finance, domestic cement production and availability, per capita income and other related variables would positively impact the demand for paints and accessories. These are the considerations that may weigh in on the market value of the group in the period ahead.

     

     

     

  • What future returns for Sterling Bank?

    With a full year return of 71.29 per cent in 2012, twice the rate of average return in the Nigerian capital market during the period, Sterling Bank opens today with a year-to-date return of 52 per cent. This is some 19 percentage points above average market return of 333.13 per cent. One of the 30 best-performing stocks in the market for the first half, Sterling Bank ranks within the best-performing stocks in recent years. But intrinsic fundamentals still suggest the bank has stronger upside potential, Taofik Salako reports.

     

    In the past 18 months, equity investors have all smiles. Nigerian equities recorded average return of 35.4 per cent in 2012. The full-year return in 2012 implied accretion of some N2.44 trillion in capital gains to investors during the 12-month period. The market opens today with a year-to-date average return of 32.94 per cent. Average market return is denoted by the All Share Index (ASI) of the Nigerian Stock Exchange (NSE), a value-based index that tracks all equities on the Exchange. Besides its primary importance as benchmark for the NSE, ASI doubles as the country index and relates average value at the stock market.

    All through, Sterling Bank has remained substantially above market average. Its share price appreciated by 71.29 per cent in 2012, pushing through opening price of N1.01 and a low of 80 kobo to close at N1.73. At the opening price of N2.63 per share, the current market consideration implies a year-to-date return of 52 per cent. This represents one of the highest returns in the banking sector. The performance of Sterling Bank is further highlighted by the fact that lenders generally are running behind the market with the NSE Banking Index opening today with a year-to-date return of 23.77 per cent.

    For long-term investors and speculative traders, Sterling Bank presents substantial returns. For traders who had anticipated the pricing trend and the opportunity that might come with additional allotment through the ongoing rights issue, they have a lump-sum three-in-one return. Besides the capital gains of 52 per cent in the past 28 weeks and the dividend yield of 11.6 per cent, the pre-allotted shares now offer additional return of 24.1 per cent, given the rights issue price of N2.12 per share, the market price and opportunity for trading of rights on the NSE. With inflation rate at 9.0 per cent and Monetary Policy Rate (MPR) of the Central Bank of Nigeria (CBN), which sets the benchmark for lending rate at 12 per cent; investment in the bank’s shares still presents substantial net return, even when adjusted for inflation and cost of capital. Such returns, such as Sterling Bank’s, are what have kept foreign portfolio investments scrambling into the Nigerian capital market, in spite of obvious macroeconomic and political challenges.

    For shareholders and long-term investors, Sterling Bank appears more like the proverbial golden hen that lays to meet the current needs and still subsists for future needs. While continuous improvements in fundamental performance and returns have seen quantum leap in shareholders’ value, such as the capital gains in the past 18 months and 100 per cent increase in last dividend payout, steady implementation of the bank’s medium-to-long-term growth strategy reinforces the sustainability of such growth and return.

     

    Symmetrical values

    Sterling Bank’s technical performance at the stock market appears to be rooted in similar performance in the fundamentals of its business operations. This is the norm for share pricing. While the arguments subsist on the time-lag and immediacy of stock market pricing efficiency, there is conclusive unanimity on the fact that share price trend will tend to reflect the fundamentals of the stock overtime. The differing nature of efficiency response time- depending on the nature of the market, investors, technologies etc, is what makes for overvaluation, undervaluation and fair value of each stock and the entire market sometimes. These are the underlying variables for continuous stock market corrections and cycles. It is within these cycles and corrections-within stocks and markets; that speculative investors make money from. For long-term investors and shareholders, the intrinsic value lies in the ability of the stock to create and sustain substantial values over the cycles and corrections. This appears to be attraction of Sterling Bank.

    Audited and interim earnings reports have shown appreciable growths over the years, underlining the consistency of the bank’s fundamentals in its transition from a small-size low-tier bank to an expansive mid-tier bank. Audited report and accounts of Sterling Bank Plc for the year ended December 31, 2012 showed that gross earnings rose by 44 per cent from N47.7 billion to N68.86 billion. Profit before tax, on the face of it, rose by 33 per cent from N5.46 billion to N7.5 billion. When adjusted for the sale of subsidiaries in previous year, pre-tax profit from core operations actually doubled from N3.6 billion to N7.5 billion. Also, while tax write-backs of N1.3 billion had boosted net profit to N6.91 billion, the bank paid taxes of N546.11 million for 2012 and still increased net profit after tax to N6.95 billion. With earnings per share at 44.3 kobo, the bank doubled cash dividend from 10 kobo paid for 2011 business year to 20 kobo for 2012. The sustainable dividend outlook was still appreciable with dividend cover of 2.22 times in 2012. At the opening price for this year, the dividend per share implied a dividend yield of 11.6 per cent, one of the highest in the market.

    Besides, the audited report had shown continuing disciplined growth in business expansion and credit risks management. Both the structure and quality of risk assets improved considerably during the year. While gross loans and advances grew by 38 per cent from N171.47 billion to N236.13 billion, classified loans dropped by about 29 per cent from N9.4 billion to N6.7 billion. The proportion of non-performing loans to total loans and advances thus halved from 5.5 per cent in 2011 to 2.8 per cent in 2012, significantly surpassing industry’s benchmark target of 5.0 per cent.

    The current earnings report shows increasingly positive outlook. Interim report and accounts for the three-month period ended March 31, 2013 showed that profit after tax rose by 96 per cent while profit before tax increased by 85 per cent. In three months, gross earnings stood at N19.84 billion as against N16.21 billion recorded in comparable period of 2012. Profit before tax jumped from N1.63 billion to N3.02 billion while profit after tax leapt to N2.72 billion as against N1.39 billion. The report underlined continuous improvement in the bank’s cost efficiency and growing market share. Pre-tax profit margin was 15.2 per cent in first quarter 2013 as against 10.1 per cent in comparable period of 2012. Deposits increased by 13.1 per cent within the three months from N466.85 billion recorded in December 2012 to N528.10 billion in March 2013. Total assets grew by 11 per cent to N645.07 billion as against N580.23 billion recorded in December 2012.

     

    Better than average

    Sterling Bank’s first quarter net profit growth signaled robust returns outlook for investors as earnings per share rose by 89 per cent from 9.0 kobo recorded in first quarter 2012 to 17 kobo in first quarter 2013. This places the bank within the top three banks with the probable earnings yield. While actual dividend payout and related dividend yield depends on the board of directors’ recommendation and approval of the shareholders at the general meeting, earnings yield is the fundamental basis for dividend payout and intrinsic value-creating potential of a stock. Earnings and dividend yields relate a company’s fundamental earnings to its share price within a specified period. Both however, depend on the entry cost of the investor. At current market consideration, Sterling Bank’s earnings-potential return outlook outweighs most stocks in the banking subsector. The lender opens today with earnings yield of 6.5 per cent. Against the discounted rights issue’s price of N2.12, the bank’s earnings yield trended upward to 8.0 per cent. Average earnings yield in the banking subsector is about 5.0 per cent. Only six banks rank above average with Unity Bank and Sterling Bank posting the highest yields. Unity Bank opens with a yield of 8.6 per cent. Zenith Bank carries a yield of 3.6 per cent. Ecobank transnational Incorporated (ETI) opens with a yield of 3.3 per cent while Stanbic IBTC Holdings opens with the lowest yield of 2.1 per cent, based on available earnings reports.

     

    Strengthening growth base

    In spite of the above-average upside potential, Sterling Bank is looking to strengthen its competitiveness and fundamental performance through additional capital. Riding on the back of successful integration of the acquired Equitorial Trust Bank (ETB) Limited, the emergent Sterling Bank seeks to consolidate its nationwide spread and operations with injection of new equity and debt capital. According to the new capital issue agenda, the bank plans to raise $80 million through rights issue and $120 million through private placement.

    Sterling Bank is currently raising N12.5 billion through a rights issue of about 5.889 billion ordinary shares of 50 kobo each at N2.12 per share, 30.5 per cent discount to this year’s high of N3.05 at the stock market. The shares have been pre-allotted on the basis of three new ordinary shares of 50 kobo each for every eight ordinary shares of 50 kobo each held as at May 20, 2013. Application list, which opened on June 24, 2013, will run till July 31, 2013.

    The rights circular indicated that the net proceeds of the rights issue, estimated at N12.13 billion, would be used mainly to finance branch expansion and increase working capital. Part of the net proceeds would also be used for infrastructure upgrade in support of automated and cashless payment as well as to enhance information technology.

    According to the breakdown of utilization of net proceeds, 35 per cent of the net proceeds, estimated at N4.24 billion, would be used for branch expansion; 15 per cent of the funds estimated at N1.82 billion would be used for infrastructure upgrade, 10 per cent of the funds equivalent to N1.21 billion for information technology and the largest chunk of 40 per cent, estimated at N4.85 billion, is billed to be set aside as additional working capital.

     

    Shareholders’ support

    Early filings from receiving agents and expressions of interests by several key stakeholders showed enthusiastic start for the rights issue. The success of the rights issue is primarily assured by the commitments of major shareholders. While four core investors hold about 35 per cent equity stake, 193 shareholders altogether hold the decisive 83.1 per cent equity stake. The supports from non-core shareholders have further strengthened the prospects for the rights issue, which had earlier received firm commitments from major Nigerian and foreign shareholders including the State Bank of India, Dr. Mike Adenuga, Suleiman Adegunwa’s Ess-ay Investments Limited and others. Sterling Bank’s non-core shareholders, with less than five per cent equity stake, include a large number of minority retail shareholders of more than 88,000. Most of the shareholders’ groups that represent small-holding retail investors have publicly expressed supports for the rights issue. These included Sir Sunny Nwosu’s National Coordinator, Independent Shareholders Association of Nigeria (ISAN); Dr Faruk Umar’s Advancement of Rights of Nigerian Shareholders (AARNS); Boniface Okezie’s Progressive Shareholders Association of Nigeria (PSAN); Gbenga Idowu’s Shareholders United Front (SUF); and Mrs. Bisi Bakare’s Pragmatic Shareholders Association.

     

    A window to the future

    Managing director, Sterling Bank Plc, Mr. Yemi Adeola, said the ongoing rights issue and other capital raising exercises were meant to support the bank’s next growth agenda, which is aimed at consolidating its stable performance over the years and enhance its competitiveness in terms of size and resilience to macroeconomic changes. According to him, additional capitalisation has become necessary because size has become increasingly important and relevant in the banking industry and the extent of capital base could be a limit to expansion in terms of physical presence and operations.

    He pointed out that additional working capital would enable the bank to expand the scope of its corporate banking business, noting that the bank is currently limited by the single obligor limit, which is a function of available capital base.

    “If with the modest capital that we have, we were able to stabilise the bank, deliver consistently better returns to shareholders and build up to become the a top tier bank. Imagine what we would do with more capital. Our shareholders have no reason whatsoever not to be excited in participating in the rights issue. You can’t regret it,” Adeola had assured.

    Four-year forecasts for the bank showed continuous growths in the top-line and bottom-line over the next four years. Profit forecasts reviewed by capital market regulators and professional parties showed that gross earnings will rise steadily from N87.22 billion in 2013 to N115.23 billion, N147.2 billion and N188.82 billion in 2014, 2015 and 2016 respectively. Profit after tax is expected to grow by about 71 per cent to N12 billion in 2013 and thereafter to N15.1 billion, N22.28 billion and N35.19 billion in 2014, 2015 and 2016 respectively. While it will plough back the larger chunk of retained earnings into reserves, cash dividend is expected to increase from N2.4 billion in 2013 to N3 billion in 2014 and thereafter to N4.46 billion and N7.04 billion in 2015 and 2016 respectively.

    Farsightedness, stable management, long-term strategic corporate plan and corporate goodwill are mitigating factors against country and industry risks of policy summersaults, corporate governance issues and heterogeneous external and domestic changes that tend to reshape the Nigerian financial services industry. In all these, Sterling Bank appears to be in better stead.