Emerging as one of the best performing stocks last week, Transcorp (Transnational Corporation of Nigeria) piqued our interest as it appreciated 11.61%, gaining 13kobo to close at ₦1.25. This rally rode off the back of info about its emergence as winning bidder for acquisition of Afam power plant. Transcorp power consortium, led by Transcorp Plc, submitted a bid of ₦105.3bn for 100% equity stake in Afam Genco, consisting Afam power plant and Afam Three Fast Power Limited.

In line with the company’s 5-year plan of growing installed capacity to more than 3,000MW, acquisition of Afam power will double Transcorp’s installed capacity to 1959MW (with additional 987.2 MW from Afam power plant). Should the acquired plant operate at full capacity, we expect a surge in Transcorp’s output and a doubling in topline (as power segment contributes 77% to group revenue) and rise in profits.

We however express concerns about financing options for the acquisition. As it stands, Transcorp’s history with Nigerian equity investors is not exactly favorable. Given the already large number of shares outstanding (over 40bn shares), an equity raise would prove dilutive to shareholders. Also, current equity market sentiment challenges favorability of equity funding, leaving the conglomerate to mull debt/other options.

With debt to capital ratio at 49%, embarking on a wholly debt financing route could lift said ratio closer to 70% by our estimation, with higher interest cost increasing total risk and heightening leverage concerns. However, we expect revenue expansion to keep interest coverage ratio tamed and elevate profits. We register that this news spells well for the conglomerate, whose power business already contributes 77% of revenue, and 86% of operating income. That said, we see the company as primarily an energy/power sector concern, raising eyebrows about its conglomerate tag.

Overall, we see increasing exposure to the power sector (which offers greater return on assets relative to its hospitality business) as a good move, igniting fresh optimism of Transcorp’s long term performance.

In our view, Transcorp is a BUY, as current market pricing offers huge long term capital appreciation potential.

DISCLAIMER:
This report by Lead Securities & Investment Ltd is for info purposes only. While opinions and estimates therein have been carefully prepared, the company and its employees do not guarantee its complete accuracy, as it was also gathered from various sources believed to be reliable and accurate at the time of this report. We do not take responsibility therefore for any loss arising from use of the information.

SOURCE (abridged): Lead Securities & Investment Ltd.