Tuesday, March 28, 2017/3:26 PM /CardinalStone Research
We met with the management of Transnational Corporation of Nigeria Plc (TRANSCORP) last week to understand the key drivers of its FY'16 results, and its plans for the future especially with regards to recent government action in the power sector. We revise our target price (TP) to N0.71 and maintain our HOLD rating on the counter. Kindly find key take-aways from our discussion.
SacOil-Transcorp JV, a renewed partnership
SacOil Holdings in 2015 announced its withdrawal from the Nigerian Oil sector as part of its ongoing portfolio rationalisation. Accordingly, the company terminated its joint-venture relating to oil prospecting licence (OPL) 281 with the Transcorp Group.
The group consequently sued Sac-Oil for wrongful termination of contract. In a counter response, Sac-Oil filed a notice for arbitration with the Nigerian Chartered Institute of Arbitrators to recover its farm-in and related fees plus contractual interest thereon.
However, management disclosed that they had re-engaged SacOil to, amongst other things, seek an amicable resolution of the issues that led to litigation by both parties, and possibly enter into a joint operating agreement to advance their partnership towards the development of the oil block.
Management expects to start lifting oil from 2019. The group has begun an exploratory drilling campaign having obtained the necessary approvals from regulatory authorities.
Closure of ABV to impact hospitality revenues
2016 was a tough year for the Abuja hotel industry as it battled with external pressures including reduced inbound foreign travel and domestic corporate expenditure.
The sector seems headed for another tough year with the closure of the Abuja International Airport (IATA: ABV) for six weeks (possibly more) in order to effect repairs to the runway.
Foreign airlines with the exception of Ethiopian Airways have rejected the use of the alternative Kaduna Airport due to security and infrastructure related issues.
In addition, the number of corporate meetings and seminars in Abuja will reduce drastically, apart from those originating within Abuja, and hence resulting in less guests, low occupancy, and shortfall in revenue for the sector.
We estimate a 25% drop in occupancy levels within the six week closure and therefore estimate 2017 average occupancy level for Transcorp's hospitality segment at 54% (FY'16: 59%) which implies a 15% drop in revenue from this segment to N12.4 billion.
Projections and Valuation
Given the closure of ABV, the attendant impact on passenger traffic and consequently occupancy rates, hotel revenue is likely to drop.
Whilst the Federal Government has guided towards six weeks, going by past experiences we are not optimistic that repair works will be completed within this timeframe.
However, activity level should lift up in the second half of the year. Management is taking advantage of the downturn to upgrade the facilities. We expect an improved performance from the power division given recent capacity additions; however, this is consequent on stable gas supply.
We therefore project a 12% rise in revenue to N67 billion. Costs surged last year due to the double impact of exchange rate and inflation. Management disclosed that NBET has commenced payment for exported electricity to neighbouring countries in dollars.
Whilst this is insufficient for their total needs, it provides some relief. In addition, with some moderation expected in inflation this year, we expect gross margin to improve to 51% from 50% in FY'16. Barring a devaluation, net finance charges should reduce by about half and thus the company should return back to profitability.
We project a net profit of N5 billion from a net loss of N1 billion. We have revised our target price to N0.75 (Previous: N0.92) due to the negative impact of the Group's debt on its valuation.
This presents a 6% upside to current price of N0.71 and therefore maintain our HOLD recommendation.
1. Corporate Earnings for the Week Ending 030317 – TRANSCORP Declares N1.13bn Loss
2. TRANSCORP Declares N1.13 mln Loss in 2016 Audited Results,(SP:N0.69k)
3. TRANSCORP Declares N1.09bn Total Comprehensive Income in Q1 2016 Result SP N1.03k
4. TRANSCORP Declares N1.44bn Total Comprehensive Income in 2015 Audited Result SP N1.11k
5. Transcorp Hotel posts 7.45 decline in revenue grows PAT by 8.59 in its Q4 15
6. Transcorp Hilton Abuja Named 2015 Hilton Brand Awards Winner
TRANSCORP declares N5.89 billion PAT in Q3 15 result Dips by 28.8 SP N2.12k
8. Transcorp Appoints Mrs. Helen Iwuchukwu as Company Secretary
9. Resignation Of Mr Chibundu Edozie From The Board Of Transcorp pLC
10. TRANSCORP Declares N14.21 bn Loss in Q3 2016 Results SP N0.87k