As we all now know, 2007/2008 was the year the Nigerian Stock Exchange bottomed out making Nigerians looses trillions of Naira. A lot of us have even vowed never to near that market again. However, last year the NSE All Share Index rose about 33% year to date making investors believe the stock market is now back to the good old days. While this is good, some of the problems and mistakes we made when we all went out to buy stocks are still there and will always be so far we still run capitalism. But that is not why we must not buy shares.

Warren Buffet once said the best time to buy stocks is when every one is afraid of buying and vice versa. People are still making millions even after crash. You only have to look to the fundamentals and open your ear to all the plethora of market information we come across everyday . For example, news that Government has eliminated duty and tax on Cement importation is bound to affect the business of local cement manufacturers, probably a sign to dump their shares.

On this thread, i will be posting my analysis and opinion of results of that have been released by companies quoted on the Nigerian Stock Exchange. I hope my analysis will help the uninformed and those that are investment savvy, my perspective on the the fundamentals of companies and what other factors may determine my decision to buy, hold or sell their shares. My articles will be very short, interesting and revealing to ensure you are not bored will too much financial grammar. I will also love to see your comments and perspective as to one can claim knowledge of everything.

Some of us who have specific information about companies that can help eliminate asymmetry will be most welcomed. This will help put forward a better and concise analysis of companies that we review. So guys, lets have some fun.

REVIEW: UPDC REITS OFFER - TO BUY OR NOT

Offer Value - N30billion

Offer Price - N10 per unit

Opening Date - February 19

Closing Date - March 28

Fund Promoter - UPDC

Fund Manager- FSDH Asset Management Ltd



The Deal Synopsis?

UPDC has been into property development for years holding major property assets in Nigeria. The company which I reviewed sometime last year has had to deal with rising operational expenses as well as debt. As such it does not surprise me that the basis of the offer is to flog some of the assets that they have in exchange for cash ostentatiously funded by the proceeds of the offer.



UPDC plans to raise about N30billion from the sale of 3billion units of shares in a Real Estate Investment Trust (REIT) at N10 per unit. As the promoters of the REIT they will also subscribe to shares in the REIT even though they will not be stumping up any cash. They will own 40% of the REIT via an exchange of assets and shares. So in exchange for about 40% of the REIT (N12billion), they will be selling some of their choice properties for a value of N12billion. In other words, by subscribing to the REIT the utilization of N4 of your N10 share in the REIT is already determined.



Another N8.8billion out of the N30billion will also be used to purchase properties already owned by UPDC as detailed in the offer. Unlike the N12billion which was exchanged for shares, the N8.8billion cash will be paid to UPDC.



After the exchange of shares and cash payments subscribers to the deal will also expect to incur an additional cost of N673.7million as offer cost (2.2%) and another N1billion as VAT. The VAT amount is based on 5% of the asset cost of N20.8billion. For those who wonder whether VAT should be paid on sale of properties, I guess VAT is paid here because UPDC holds those properties as stock in its balance sheet rather than as Assets. Thus necessitating the VAT payment. Whilst this may seem logical, there is a reason to challenge this payment, and I expected UPDC to offer explanatory notes explaining the basis for charging VAT on this exchange.



At the end of this the REIT will have about N7.4billion in investable fund and based on the fund managers allocation proposal, the rest might be invested in some Fixed Income Securities such as Bonds. Actually 10% of the N30b raised will be invested in liquid assets/cash.



Interestingly, the assets would be transferred under a Declaration of Trust structure (DOT). The D.O.T basically involves a system of transferring beneficial ownership of assets to a trust without actually transferring title thus avoiding taxes and statutory fees associated with the sale of assets. This perhaps is where the VAT fees arose since an exchange of beneficial interest will surely be seen as vatable. An uncanny way of transferring taxes to the buyer rather than the seller right?



How did they value the assets and what assets are they selling to the REIT?

UPDC has some choice properties scattered all over Nigeria which has earned them rental income over the years. However, they are only selling 5 properties. One of the properties on sale the Victoria Mall Plaza on Aboyade Cole VI, is currently occupied by KPMG. See below;







UPDC has placed the combined "Open Market Value" of the assets at about N21.9billion and will be transferring to the REIT at about N20.8billion offering discount of about 5% on the asset value. They also claim the assets generate a combined N1.297billion in average annual income historically representing yield of about 6.26%. To make the investment look good they project the revenue will rise to N1.6billion or about 7.7%. The problem with this valuation metric is that cap rates in Nigeria is mostly 10% at least which would place the average vale of the combined assets at about N12billion instead of the N20billion transfer value.





What are the risk?

The offer prospectus outlines some risk for investors in the REIT which includes obvious ones such as political risk, market risk etc. However, one that comes to mind is the very unpredictable nature of the Nigerian market. Real Estate in Nigeria today is currently over valued due to a mixture of higher than normal construction cost, inefficiency in management of projects, high cost of taxes, and over bloated land cost. This stand the risk of a huge correction should the market find better and cost efficient way of construction thus bringing down values of properties including older ones which were built at a higher cost. The ability for businesses to continue to pay high rental cost is also a huge factor in determining the viability of income projections.



However, this may not be enough to deter investors who have an exit option should they sense a likely softening of the market in future. Shares on the REIT are tradable on the floor of the NSE.



What do I benefit from this?

Basically, you get to own part of a pool of real estate assets which will be managed by experienced managers. The assets is expected to generate income and the promoters project 7.8% payout yield at the ned of the first year and then 8.4%, 9.7% for the second and third year respectively. This essentially means for every N10 you invest you will be getting 78kobo per annum. Surely, you could get better returns in a government debt but the surely at 7.8% you get a better dividend yield than the 5% the stock market pays out on an average. You can also make capital gains on the sale of the units in the event that the Net Asset Value of the REIT goes up.



Should I buy

That depends on how deep your pockets are. REITs are an attractive investment for Pension Funds and large mutual funds who depend a lot of a fixed stream of income to fund periodic payment obligations. In Nigeria, most pension funds are mandated to invested on Real Estate businesses with a purely rentable model and as such buying into a REIT is a no brainer. For individuals who sort of fall into the category of those with deep pockets and looking to invest in the future then this may also seem like an attractive investment outlet. This REIT however posses some doubts as to the verifiability of the value placed on the assets being transferred by the promoters UPDC. In addition, REITS are relatively unknown investment outlets in Africa making the assumed liquidity of the trust units somewhat illiquid. Whats the point investing in an traded equity that can't be easily sold or exited. For me though, I could certainly generate better yield on my investment without investing in a REIT. But then, portfolio diversification is always welcome.



Finally,

REITS are an increasingly essential option in investing in Real Estates. Its very popular in the middle east and is gradually increasing its footprint in Africa. Nigeria certainly needs more of this to create a deeper market helping investors make better informed decisions. The Nigerian Stock Exchange only has two RIETs the Sky Shelter Fund (which I reviewed recently) and the Union Homes fund and they both witness minimal trade by volume and have a combined market value of about N14.5billion. The inclusion of UPDC's REIT takes the number of REITs to three with a potentially combined value of about N44billion still about 0.09% of the combined market value of the equities on the NSE. For now though, this is a good development for the Real Estate Market in Nigeria.

CADBURY - CANDY..OU PLEASE PAY MORE DIVIDEND?

Cadbury Plc released its 2012 Full year audited financial statements with revenues slightly dipping 1.76% year on year to N33.5billion. Operational profit was N4billion (12% operational profit margin) compared to the N4.6billion posted a year earlier. Profit after tax at the end of the period was N3.45billion compared to N3.67billion a year earlier.



You can either view this flat result as half empty or half full after all profit margin was 10% compared to 11% a year earlier. In addition, the challenges the company is facing has been discussed in an earlier post on my Blurb page . Currently, revenue stability will be accepted in the absence of growth in these harsh competitive environment leaving me to worry about something more pertinent. Why is Cadbury proposing to pay just 50kobo per share as dividend when it has over N15.7billion in cash (it was N10.5billion in 2011)? A 50kobo per share dividend amount to a total dividend payout of just over N1.5billion or just 10% of total cash available. A whopping N5.2billion in extra cash was generated this year after spending N1.8billion in investments. Working capital is N9.2billion and tax liabilities of N662 million is just 4% of cash held.

Shareholders of Cadbury have enjoyed quite a bullish run in the value of their shares. The stock has returned is N34.8 compare to just over N12 a year before. That is a massive 188% return. But the price is obviously riding on a bubble and can last too long. A trailing P.E ratio of 24.7x and a current one of about 31.6x is nothing I'd be crazy about. Growth prospects for Cadbury can't justify such price highs making the company appear sweeter than it taste. But still shareholders are in a candy store




Cadbury will make the argument that return on equity averaged 18.7% this year so why should shareholders be bothered. But return on average equity is down 24% from the year before and adjusted for inflation is back to 6.7%. The proposed dividend per share of 50kobo provides a yield today of about 1.4% (the market pays an average 5%). Ex div (after dividend payment) may rise by another 50% and still not up to average.



But why all the complaint anyway after all Cadbury is 75% owned by Kraftsfood and 25% is owned by Nigerians who are in the minority who are very well compensated with capital appreciation? Oh well tell that to a kid in a candy store!!



Cadbury Nigeria Plc audited accounts for 2012 can be found on the website of the NSE

Good thread.

Please, keep them coming.

LAFARGE/WAPCO 2012 RESULTS - DIVIDEND OF INVESTMENT

Lafarge Plc released its 2012 Full year audited accounts with revenues increasing 40% to N87.9billion. Operating profit also doubled to N25.7billion when compared to 2011 when profits where N13.35billion. Operating profits margin at the end of the year was an impressive 29% up from the 21% posted a year earlier. Pre tax tax also more than doubled to N21.2billion whilst Profit after tax was N14.7billion resulting in a profit margin of 17%. Return on average equity at the end of the period was a 23% or 11% when adjusted for inflation.



The market off course has responded positively with share price rising sharply by 6.1% to N74.29 (from N70)at the close of business 27th March 2013 and that is after loosing N3.99 a day before. The result is an indication to most investors, as it is evidence that their expansion programs is now beginning to yield fruit as revenues have continued to increase despite total assets remaining unchanged and expenses also staying nearly flat. In fact the Return of Assets of 17% was ably boosted a higher asset turnover of about 58% compared to operating profit margin of about 25.7%. The company is presently enjoying a ride as their investment are now boosting profits.



Things are however not so rosy cash flow wise for WAPCO/Lafarge. They currently have a negative working capital of N8billion and still end of spending almost all of the N22billion generated in operating cash flows in paying down loans and dividends (N22billion) as well as another N5billion on Investment leaving them with a negative cash generated of N2.2billion. Nevertheless cash carried forward from the prior year still provides enough buffer helping them end the year with about N8.8billion in the bank. A dividend pay out of N3.6billion (N1.2 per share) for the over 3billion outstanding shares is fully covered.



One could opine it only amounts to a payout ratio of just 25% of profits which in itself is not bad. Last year dividend was 75kobo or 27% of profits and so achieving that same payout ratio would have cost them an additional N300million. On a flip side, this years dividend payment is N1.3billion higher than 2011 and their share price has seen a capital appreciation of almost 89%. So buckle up and cement your positions, the share price is about to take off even higher.

http://www.nse.com.ng/Financial_NewsDocs/LAFARGE%20%20CEMENT%20WAPCO%20NIG%20PLC%20YEAR%20END%20AUDITED%20RESULTS%20DECEMBER%202012.pdf

JULIUS BERGER PLC 2012 RESULTS – REVENUE UP, PROFITS UP

Julius Berger Plc released its 2012 year ended audited results posting a revenue of N201.5billion for the year. The revenue beats estimates of N175billion which the company projected for the year ended. The revenue is also higher than the N169billion posted in the corresponding year. Operating profit was N12.9billion, 21% higher than recorded a year earlier. Profit after tax rose 87% to N8.2billion higher than the N4.4billion posted the same period last year.



This is by no small measure a fantastic result for the company and the shareholders who now expect to approve a proposed dividend of N2.5 per share. Their share price currently sits at N53 and has a year to date capital appreciation of about 89%. A N1million investment a year ago costing N31 per share will today be worth about N1.7million today (March 29,2013) at todays share price. Dividend yield is also 5% inline with average market expectations. Return on Average equity of 66.4% is also a massive improvement on the 45% posted last year. The company is basically using clients money to make money…what else is as sweet as that?



Enough of the highlights and here comes some bad news. JB’s business model is a profitable one quite alright even though profit margins are just under 5% at 4.4%. That is typical with construction companies and for the type of equity capital they have, that probably isn’t too much of a worry. The worry however, is the huge pile up of amount due to customers under contracts mean to the operations of the company. That figure currently stands at N105billion compared to the equivalent in receivables of just N5.5billion. So the company will have to rely on money from new contracts and probably hope that other debtors pay up. Admin cost is also a worry eating up about 71% of Gross Profit compared to 68% the year before.



All this might be a worry but JB has over the years consistently delivered profits. They are also the foremost construction company in Nigeria with very heavy patronage from the Federal Government. These are all economic boons the company can and has always leveraged on. Current holders of the stock will mostly hold for the longterm as the stock good for a value portfolio. For intending owners of the stock, the current share price is about 7.7x its earnings while the price to book ratio 4.1x. This in value terms is a buy proposition as the stock currently appears cheap. Unfortunately, intending buyers may have to wait a little more as the shares are hardly available in the market.

GTB 2012 FULL YEAR RESULTS: INCREASE PAT BY 81% TO N86.6BILLION

GT Bank released its 2012 audited accounts with Gross Earnings rising 21% to N221.9billion. Net Interest Income also rose 32% to N130.6billion representing an interest margin of 76.7% (77.9% 2011) and further highlighting the cheap direct cost of funds available to the banks for the period. Interestingly the bank reduced its loan losses from N20.6billion in 2011 to just about N836million this year indicating either a write back or a spill over effect of the transfer of bad loans to AMCON.



Operational Profit for the period was also N103billion (2011: N62billion) and represents about 46.4% of Gross Earnings (2011: 34%) taking in the positive impact of the reduction in loan losses. The bank known for managing operating expenses, spent N43 (2011: N53) for every N100 of Net Operating Income generated (that is after deducting interest expense and loan losses) on overheads. Personnel Cost increased 16% to N25.billion but represented just about 14% (2011:17%) of Net Operating Income.



Profit after tax was N86.6billion an 81% increase from the N47.8 billion posted in 2011.The bank ended the year with an impressive Return on average equity of 33.7% . GTB has proposed a dividend per share of N1.3 representing a yield of about 4.7% (based on todays share price of N27.45). Investors reacting to the results with share price rising 5.17%. The current share price of N27.45 gives the share price a 9.15x premium on earnings per share, a relatively cheap proposition. Expect this share price to double by year end. It currently has a 101% return over the last one year





GTB 2012 Audited Accounts was posted on the website of the NSE

Ride on,good analysis

Good one. Could you please do one for Japaul Oil amd Maritime

Looking at the kind of corruption and insider trading on Wall Street, London stock exchange, I can't help but wonder how that of Nigeria will be.

I need a stock broker. How can i get one?

Good analysis. Two thumbs up.
Am watching this space.

The master Ugometrics himself, never knew you were here, following this post from now on, i follow your blog whole heartedly.
Keep up the good work.

ACCESS BANK POST N42BILLION PAT FOR 2012..SHARE PRICE IS A CHEAP P.E OF 6.2X

The headlines you'd hear following Access Bank release of its 2012 full year audited accounts will surely sound like this "Access Bank Increases Profits after tax by 151%!!!". Well, that is quite true going by the results published today on the website of the NSE. The bank increased Gross Earnings by 53% to N208billion for the year. A huge portion of its gross earnings came from Interest Income which garnered about 77% of earnings or N161.4billion. Net Interest Income, an important metric in determining how efficient a bank is at making money from its core function as a lender also saw some marked improvement. The bank posted a Net Income of N96billion (2011:N69billion) for the year a margin of about 60% (2011:65.7%)



The bank spent more on operating expenses in the year under review as expenses rose 33% year on year to N87.5billion. In terms of efficiency, the bank is spending N67 of every N100 in Net operating income on paying salaries and running admin cost. Personnel Expenses grew a whopping 53% to N33.6billion during the year. The Bank is spending N25 on employees for every N100 of Net Operating Income it earns (GTB spent an equivalent of N14). It will be interesting to exactly know the reason for this which will be possible when they publish their annual report.



In what might seem like a blip to their results the bank generated negative operating cash flows of about N13billion surviving mainly on cash received from sale of investments and cash brought forward from prior year. It 2011 it generated a whopping N120billion as cash flow from operations



Access Bank will go on to post a Profit After Tax of N42.8billion a 150% rise from the N17billion posted earlier. Pre-Tax profit which is probably a better industry measure grew about 86% to N44.8billion. On the deposit side, the bank grew its deposits by an impressive 9% to N1.2billion putting them higher than GTB at the end of the year. Loans during the year also grew by about 5% to N600billion (2.5x its Net Assets).



Investors reacted cautiously to this result as its share price rose mildly to by N0.01 to N10.5. The share price has a current PE ratio of about 6.2x and has a trailing price to book ratio of 1.03 making it one of the cheapest stocks in the market. They plan to pay a total dividend of 85kobo per share in two tranches of 25koko and 60kobo. Total dividend yield amount to an impressive 8% (even though you might have to adjust it lower since dividend will be paid twice) and a payout ratio of about 50% of earnings.







Access Bank Results was posted on the Website of the NSE

Ugo this is a very good job. Keep it up but don't be too technical.

ZENITH BANK BREAKS THE BANK, MAKES A RECORD N100BILLION PAT FOR 2012

Zenith Bank has released its 2012 Full year financial statements and in typical fashion broke records. They have now made headlines as the first local bank to hit N100billion in Profit After Tax. Zenith Bank finished the year with a Gross Earnings of N307billion up 25.8% from the N243billion they posted a year earlier. Interest Income a major part of the gross earnings was a whopping N221billion (2011:N163billion) for the period under review. Net Interest Income (which is interest income after deducting interest expense) was N156billion meaning that they incurred N29 for every N100 of Interest they earned. Zenith Bank also earned an extra N50.4billion in commission and fees for the period and an extra N20billion from other sources bringing the total Net Operating Income to N218billion. Zenith Bank will go on to post a record N102billion in pre-tax profits and N100.6billion in profit after tax for the year ended December 2012.



How did they get here?

This is where it gets interesting! So from the N307billion the bank earned as gross income N218billion will be left after deducting interest it pays to depositors and other direct expenses. Zenith has thus efficiently retained 71% of its gross earnings. Surely, the bank also incurs other operating cost such as personnel cost, depreciation, admin expenses etc. The total of this for the year came to about N119billion (2011:N116billion) leaving the bank with an operating profit of N98billion. They now earned an extra N3.5billion from discontinued operations (winding down of businesses they no longer need) which helped took them past the magical N100billion (actual was N102billion) in pre-tax profits.

How good is this result?

Zenith unlike its peers has been bogged down with huge operating cost over the years and I always figured if they are able to keep operating expenses growing below 5% they will pass the likes of GTB in terms of profitability. This they have done this year as operating expenses only sliced 55% of Net operating income. For shareholders of the company who love to hold longterm, Zenith bank also had an impressive return on average equity of 23.5% (2o11:12.4%). The implication of this is that the bank has been able to earn an extra N23.5 for every N100 shareholders own which is on industry average in quite high. Zenith Bank also ended the year with a good customer deposit base of about N1.9trillion, about N700billion more than GTB. Loans and advances also grew 10.7% to N989billion. I expect the bank to lend well over N1.1trillion by the end of this year (2013) as it cautiously looks for quality assets (borrowers).



Is the stock worth buying?

As mentioned in my past blogs, most banking stocks are cheap trading well below 10x their earnings. Compare that to Nestle trading at 28x or Cadbury 24x. As at 3rd of April 2013, Zenith Bank cost N22.28 per share representing about 7x its earnings. That in my view is cheap stock considering he impressive ROE of 23% and non performing loan ratio of 3.15% (maximum to be worried about it over 5%). It is worth nothing that banks have a way of wiping out past profits in just one year of bad loan making. Zenith Bank on the back of this result is a buy for me!!!





Zenith Bank Published its 2012 Audited Accounts on the website of the NSE

PRESCO PLC INCREASES PAT BY 377% TO N8.6BILLION: IS IT A CASE OF CREATIVE ACCOUNTING

If you have been following my blog then you'd be familiar with my likeness for Presco Plc. As an indigenous Oil Palm company the company is in the forefront of those leading non-oil exports for Nigeria. I have blogged about them twice in the past and at that time I recommended a buy and hoped it will drop to a price of N10 (even though it was N14 at the time) for value hunters like me to buy. Today their share price is N22.5 and has risen 125% Year on Year. Why the alarming headline then



Presco released its 2012 full year earnings with revenues rising 31.8% to N11.2billion. Gross profit also increased 106.5% to N8.3billion as the company reduced its direct cost from N4.4billion to N2.8billion in just one year!!!. Operating profit increased from N3billion in 20111 to N9.2billion in 2012 following a massive 89% drop in overheads to N182million. This company must be some draconian cost cutting spree!! Expectedly, profit after tax increased in tandem from N1.7billion to N8.5billion at the end of the year. Now this is a remarkable feat by no small measure and it is important one knows why and how it happened.



How did they get here?

Since I obviously do not have answers to why I can attempt to understand how they got here. Looking at the result, it is easy to conclude the 377% rise in profit after tax is as a result of a huge cost cutting drive as the company reduced operating expenses and cost of sales by about 130% and 35% respectively when compared to the prior year. Yet they increased revenue by 31.8%. Digging deep one wonders how they were able to reduce cost of sale to N2.8billion while yet growing revenue. Also, the company reported zero selling and general expenses for the year only accounting for N182million as distribution expenses only. That was a red flag for me and so I had to dig into their nine months results which I reviewed in the past. At the end of september 2012, the company reported that it incurred about N1billion on SG&A and distribution expenses and another N3.3billion on cost of sales. How did a combined N4.4billion in direct cost and expenses (in 9months) get reduced to just under N3billion in the remainder three months??



One could say even if you estimated a cost and expenses of about N5.5billion (going in line with the 9 months result) profit will still be an impressive N6billion or so why the alarm. However, a slight indication of unclear financial reporting is enough for any serious investors to dump the shares of a company. I hope they come up with a logical explanation soon enough or probably just tell us there was a typo in there somehow.



How good is this result

Without being prejudiced I will decline to give an opinion on the results as it fails to give any reasonable explanation. Too many questions to be answered to enable one make an informed investment decision. Hopefully, there will be some clarification soon.



Is the stock worth buying?

As mentioned above, Presco on the back of its past year is a buy and hold stock. The current price of N22.5 representing about1 2.6x of trailing earnings (2011 PAT) price to book ratio is 1.3x for the most recent quarter. This current result if it stands will further reduce P.E ratio to about 2.6X making the stock look like a candidate for a rally. The company on the back of this result also declared a dividend per share of N1 same as what it declared in 2011. At N22.5 the stock is appears cheap making my desire for a N10 price a pipe dream. Ironically the stock lost N2.5 in value after announcing this result yesterday!!





Presco 2012 Audited Accounts Appeared on the website of the NSE

Great work. Taking notes.

Bros You need to dig in more on this Presco o!!cos with an eps of 8.65....a pe of less than 3..

i wan unleash my whole retirtement savings on this one o!!

Meeeen! Se People no like this page ni? Pls comment na. It's not as bad as it looks. Lolz

NAHCO PLC POST N593MILLION PAT DOWN 25.7%: HUGE OPERATING COST

Nigerian Aviation Handling Company (NAHCO) released its earnings report with revenues rising modestly by 4% to N7.3billion. Operating profit at the end of the year was N905million compared to N1.2billion posted in 2011.Profit after tax also dropped 25% to N593million at the end of the year. The company has proposed to pay dividends of 25kobo per share based on this result down from the 40kobo per share paid a year earlier.

Opinion on the result?

From the initial results posted one is quick to point out to increase in operating cost as well as cost of sales as both rose marginally higher than the increase in revenue during the period. The aviation industry took a big hit last year following the plane crash and several controversies surrounding the sector which affected growth industry wide. Passenger traffic is expected to fall in 2012 when compared to 2011 stemming from the crisis in the industry which may be a reason for the minimal revenue growth. NAHCO face little competition in the industry and should actually do better despite the crisis in the industry. A silver lining in this result may perhaps be their ability to reduce debtors by half over the last year to N1.1billion. However, working capital for the period was negative as current liabilities over shot current assets.



The company also has a good cash pile of about N819million and generated a whopping N4billion in operating cash flow. But with their planned dividend payout of 25kobo per share and outstanding shares of over 1.4billion they will have to look for cash to pay out over N370million in dividends (almost half their december cash balance)


Is the stock worth buying?

Results like this should be viewed in a larger context . Whilst revenue have been increasing over the years, profits have declined from about N1.1billion in 2010 to the N593million they posted this year. Return on Earnings this year also dropped to 11.2% compared to 15% last year indicating a decline in optimizing shareholder value over the prior year. Also for a business with spends up to 74% (2011:63.7%) of its Gross Profit on operating expenses and likely growing the company looks to lack competitive advantage in an industry it solely dominates.

Investors have also not taken likeness to this stock as it has declined about 2% year on year to N6.40. In fact it has been on a slide over the last month dropping from N7.90 on the 4th of March. Year to date it has gained 93kobo having opened at N5.47 and peaking at N8.8 at the end of the January 2013. The current share price represents a premium of 15.6x over its earnings per share. I expect the intrinsic price to be about N4 per share or 1.1x its Net Asset Per share (Book value per share) which is just N3.6. Holders of the stock may consider selling as the fundamentals don't justify the current price especially if their results continue to decline. Watch out for their first quarter results as this will give a clear direction of things to come this year.

Note Pls: Corrected the Net Asset Per share, it is N3.6 not 61kobo as previously stated. This resulted in my adjusting its intrinsic value to N4 from N2 earlier posted





NAHCO Plc 2012 Audited Accounts is published on the website of the NSE

great job you are doing Ugo. folloing!

FORTE OIL PLC, FINALLY FINDS PROFIT BUT....

Forte Oil Plc (formerly African Petroleum) has announced profitability for the year ended December 2012. The company posted a profit after tax of N1billion reversing its last year loss of N10.8billion. This is despite a drop in revenue from N117billion in 2011 to N90.9billion at the end of December 2012. Operating profit also turned positive during the year reversing the N9.8billion loss in 2011 to N2.8billion in 2012. So how was this possible despite a dip in revenue?



Opinion about the result

The company was able to achieve profitably despite a dip in revenue growth year on year by simply reducing overheads and direct cost. They were able to save an amazing N39billion in cost over last years expenditure helping them turn into profitability. That is a remarkable feat in under one year and it will be interesting to see how this was achieved when they release their annual report. But the result, however impressive still leaves loads of concern for me especially on the balance sheet side. Total loans have increased from about N9.3billion to about N13billion in just one year!! Overdrafts make up a huge chunk of this rising 55% year on year.

The company is also not generating enough organic cash from operations to cater for investments and repayment of loans. For example, whilst it generated N1.9billion in operating cash flow, it spent N3.3billion in investments and another N1.8billion in net loan repayments. It is easy to infer that the company currently cannot repay it loans as it stands. Negative working capital was also N9.8billion (2011:N8.2billion negative) as they grapple with huge trade creditors.

Whilst they have done well with cutting cost drastically, SG&A slicing off 77% of Gross Profit is still a put off for me for any business. At the end of the first half of 2012 the industry average was about 76.5% with the likes of OANDO posting 63% and total 67%. More can be done here I believe.



Is the stock worth buying

Currently the company has a negative retained earnings of about N53.8billion. This means for them to be able to pay dividends some day, they will have to make enough profits in excess of N54billion. They could also seek SEC approval to set of their share premium of about N62billion to pay this off thus wiping out almost N55billion in share capital. For me this option will be logical if current fundamentals justify their path to financial integrity. One year's result is not enough for me to believe that is happening anytime soon.

In typical Nigerian fashion though, their share prices has traded positively over the last year rising 28% year on year to about N13.65. This will give it a premium of 15.6 over its current earnings per share. Expensive in my view! Book Value per share is currently N7 meaning the share price has a N6.6 premium over its net assets. Now this in most cases is an indication of a cheap stock, however, their negative reserves and poor debt to equity ratio is enough to send shivers down my spine. Clearly one could make a case for a share price of about N17 as its ideal value (based on Ebita multiples) but that would be on the assumption that profitability will continue amidst declining revenue and more cost cutting.

I am no optimist when it comes to valuing stocks making me pit a price of about N8 as a buy proposition.





Forte Oil 2012 Audited Accounts can be found on the website of the NSE

Great analysis you are giving in this forum.
thanks for this...

@OP nice job, is Forte oil formerly Agip or AP(African Petroleum)

@ugodre, nice analysis but am waiting for your analysis on sterling bank and CCNN

excellentmomma: @OP nice job, is Forte oil formerly Agip or AP(African Petroleum)

Thanks a lot for the observation. I have corrected it.

CCNN PLC POST N1.19BILLION PAT: RISING COST, SLUGGISH REVENUE GROWTH

Cement Company of Northern Nigeria Plc AKA CCNN is one of the foremost Cement Companies in Nigeria competing with the likes of Dangote Cement and Wapco Lafarge. The company reported an 8.7% rise in revenue to N15.1billion for the period ended December 2012. Gross Profit however dropped from N5.5billion in 2011 to N4.24billion in 2012. Operating profit also dropped by half year on year to about N1.8billion. The company also disappointed as profit after tax dropped 48% from the prior year to N1.19billion.



So what happened?

Going by the numbers, one might conclude the company have failed to generate enough growth in revenue to cover expenses. However, CCNN has actually performed averagely in terms of growing revenues over the last 5years as revenues has grown from about N9.8billion in 2008 to the N15.1billion posted in 2012 resulting in a CAGR of about 9%. But compare that to pre-tax profits which have dropped by a CAGR of 9% over the last five years too. The problem is that expenses have grown much higher and pre-tax profits has had a zigzag revenue growth over the last 5 years. In fact the best year was in 2009 where they made a pre-tax profit in excess of N3billion, other results have been sea saw like.



Zeroing in to 2012, the companies cost of sale appears to be their achilles heel rising from N8.2billion to N10.8billion. They therefore earned N28 from every N100 of revenue made after deducting cost of sales. SG&A increased slightly by just 9% helping further dent profitability during the period. I am even more worried that about the percentage of SG&A that is sliced out of gross profits, 80%!!!! Surely, the company is in a highly competitive sector.



Any Silver Lining?

On a flip side though, the company has zero long term borrowings a marked difference from its competitors. Much of the company's assets are financed with trade creditors (24%) while as Equity covers 53%. In terms of their ability to sell their inventories quickly enough, the company had an inventory turnover of 2X which when compared to Wapco's 4.7X may explain why revenues haven't quite grown enough to match rising cost. Nevertheless the revenue was still able to provide a ROE of 14% and ROA of 13% and example of how little or no debt can help a company make good profits despite declining revenue growth. The company has clearly used its assets to generate very good sales earning over N1 in sales for every N1 in assets invested.



Is it worth Investing?

CCNN has been around for years playing in the northern market. The emergence of Dangote Cement as a nationwide giant will surely impede on their market share forcing them to loose more and more business. A radical approach is needed to survive in the competitive cement industry. Currently, the industry is having to cope with a glut in the market as more and more cement gets imported whilst production capacity locally also increases amidst high operating cost. The share price is currently N10.55 and has risen about 125% year on year. The price represents a P.E ratio of just 11x making it appear cheap when compared to Wapco 16x and Dangote 23X.



In a today's bullish market this looks like an attractive price but don't be fooled, the premium appears high considering the latest result and outlook for the company. A company that spends 92% of its income on operating and direct expenses despite still posting double digit ROE is a company on the decline. Hopefully, management will act quickly.




CCNN 2012 Audited Accounts is posted on the website of the NSE

Born 2be Rich: @ugodre, nice analysis but am waiting for your analysis on sterling bank and CCNN

Just posted that of CCNN. Let me know what you think? Tnx