ABC Transport's H1 2021 Result: Earnings Dip as Liquidity Poses Growing Problems

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Tuesday, August 31, 2021 / 06:00 PM / by Iyioluwabomi Onakoya, Proshare Research Intern / Header Image Credit: ABC Transport


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ABC Transport appears to be recovering from the adverse effects of the Covid-19 pandemic when total liabilities soared by +61.17% to N4.77bn in H1 2020. This is reinforced by the +76.81% growth in the transportation and storage sector in Q2 2021. The coronavirus-induced recession of 2020 destabilized the company on a larger scale than the 2016/2017 recession, evidenced by the difference in the company's 2017/2018 and 2021 recovery numbers.

 

Based on historical data, the company may tread slowly on the path of recovery if the economic situation does not deteriorate. However, its losing battle with capital efficiency and liquidity might snuff the light from the business faster than any economic disruptions. Investors should be wary of a company that is comfortable utilizing inefficient capital in production.

 

The rise in the transportation company's net earnings became halted by an increase in operating expenses while interest income fell by -99.27%. A decline in cost of sales supported the hike in net earnings despite the -11.83% drop in its revenue estimates. ABC's financial statement suggests that the decline in revenue resulted from a notable decline in income from trading spare parts.

 

In addition, ABC Transport's current assets rose by +18.96% in H1 2021 due to increases in trade receivables (debtors), other current assets, and current tax assets. The rise in trade receivables followed a decline in trade payables (creditors), resulting in less cash to fulfil short-term liabilities. Available data reveals that the company offset some of its current liabilities and financing costs in the recent session despite declining earnings in H1 2021.

 

Key Highlights

  • The company's total revenue declined by -11.83% to N3.03bn in H1 2021 from N3.43bn in H1 2020.
  • Cost of sales declined by -20.36% Y-o-Y to N2.4bn I H1 2021 from N3.01bn in H1 2020.
  • Gross profit surged by +49.27% to N627,558 in H1 2021 from N420,422 in H1 2020.
  • Profit before tax (PBT) plunged by -104.34% Y-o-Y to N15mn in H1 2021.
  • Finance costs dipped by -30.13% year-on-year to N89,176 in H1 2021.
  • Interest income plummeted b-99.27% to N252,000 in H1 2021 from N34.58mn in H1 2020.
  • ABC Transport's total assets rose Y-o-Y by +1.45% from N2.35bn in H1 2020 to N2.79bn in H1 2021.
  • The total debt of the transportation company rose by +37.21% to N1.06bn in H1 2021
  • Earnings per share declined by -75.21% from N23.84 in H1 2020 to N5.91 in H1 2021.
  • Working Capital sunk by +13% in H1 2021.

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Share price movement

The average share price of the transport company in the past seven months has averaged N0.34/share. ABC Transport's share price declined from N0.35/share in January 2021 to N0.28/share in March 2021. By May, the share price recovered and shot up to N0.44/share before crashing by -22.73% to the mean price in the same month. The company's share price appreciated by +2.86% year-to-date (YTD) to N0.36/share as of August 13, 2021. This is contrary to the movement All-Share Index (ASI), which has declined by -1.49% in the same period (see chart 1 below).

 

Chart 1: Movement in NGX ASI and ABC Transport Share Price

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Source: NGX, Proshare Markets


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Profitability; Disappearing Cash Inflows

Revenue

ABC Transport's revenue sunk by -11.83% to N3.03bn in H1 2021. This is shortly after the +13.53% spike in earnings to N3.43bn in H1 2020, year-on-year (Y-o-Y).

 

Further analysis of the company's statement showed that the dip in revenue came about by a -54.52% decline in earnings from the sale of truck/spare parts by ABC Transport to N841.9mn in H1 2021 (see chart 2 below).  

 

 

 

Chart 2: ABC Transport's revenue H1 2017- H1 2021 (N'm)

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Source: ABC Transport Financial Statement, Proshare research

 

Profit Before Tax

The brief recovery recorded in H1 2019 was smothered in H1 2020 when the company made a N345.87mn loss. In H1 2021, its PBT rose significantly by +104.34% to N15mn, indicating that the company is slowly returning to pre-Covid status. Analysts expect to witness a continued rise in profit levels since the hike in the cost of sales and miscellaneous income loss recorded in H1 2020 were corrected in H1 2021 (see chart 3 below)

 

Chart 3: ABC Transport's Profit Before Tax H1 2017 - H1 2021 (N'm)

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Source: ABC Transport Financial Statement, Proshare research

 

Return on Equity (ROE)

The road transportation company's ROE has steadily dropped since H1 2017 due to substantial declines in its net income. ABC Transport's profitability appreciated in H1 2021, resulting in an increase in return on equity from -0.24 in H1 2020 to -0.06 in H1 2021. Available data reveals that the company earned a loss for every unit of capital invested by shareholders in H1 2021. This will negatively affect the company as it signals investors that there might be an underlying problem worth investigating within the business since its ROE track record has been underwhelming, year on year (see chart 4 below)

 

Chart 4: ABC Transport Return on Equity H1 2017 - H1 2021

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Source: ABC Transport Financial Statement, Proshare research

 

Net Profit Margin

The net profit margin of the organization assesses the ability of the management team to generate enough profit from its turnover. On average, ABC Transport has generated a loss from its earnings since H1 2018. The improvement witnessed in H1 2021 was fuelled by a decline in loss after tax by +75% during the session (see chart 5 below)

 

Chart 5: ABC Transport Net Profit Margin H1 2017 - H1 2021

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Source: ABC Transport Financial Statement, Proshare research


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Liquidity Position; The Mighty Operational Squeeze


Working Capital

The company's working capital has declined substantially since H1 2018 as current liabilities have repeatedly trumped the total current assets of ABC Transport. The dire state of its working capital may turn away investors as it indicates that the assets are not effectively utilized. Also, with prevailing numbers it shows the company is facing serious liquidity squeeze which could negatively impact earnings going forward (see chart 6 below).

 

Chart 6: ABC Transport's Working Capital (N'mn)H1 2017-H1 2021

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Source: ABC Transport Financial Statement, Proshare research

 

Current ratio

Available data reveals that the company suffers from liquidity issues as it has consistently been unable to meet analysts' benchmark of 1.24:1 within the past 5-years. The company recorded its lowest half-year current ratio in H1 2020 following the adverse effects of the coronavirus-induced recession. However, by H1 2021 the


The transportation company's ratio improved by
+24.70% to 0.70. This rise hinges on the -4.60% dip in current liabilities in H1 2021 that was reinforced by   the +18.96% rise in ABC's current assets
(see chart 7 below)

 

Chart 7: ABC Transport's Current ratio H1 2017 - H1 2021

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Source: ABC Transport Financial Statement, Proshare research

 

Quick ratio

ABC's quick ratio figure inched upwards in H1 2021 from +0.39 in H1 2020, however, this is lower than the industry benchmark of 1.14:1. The company's most liquid short-term assets rose by +27.86%, which improved ABC Transport's liquidity. But the increase in its trade receivables (debtors) and a corresponding decline in trade payables (trade credit) decreased cash-in-hand in H1 2021 (see chart 8 below)

 

Chart 8: ABC Transport quick ratio H1 2017 - H1 2021

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Source: ABC Transport Financial Statement, Proshare research

 

Interest coverage ratio

The interest coverage ratio reveals a +106.21% recovery from the negative value recorded in H1 2020. However, this is below preferred standards as recent figures indicate that PBT can only pay off the company's debt obligations 0.0002 times. Despite the remarkable recovery in H1 2021, the company needs to increase its PBT in the next session to satisfy analysts' preference of 1.5, according to the corporate finance institute. The subpar value signals to investors, lenders, and other stakeholders that ABC cannot pay off its interest expense and will likely default in the future (see chart 9 below).

 

Chart 9: ABC Transport Interest coverage ratio H1 2017 - H1 2021

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Source: ABC Transport Financial Statement, Proshare research

 


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Leverage

Debt-to-equity ratio

The latest result shows a Y-o-Y increase in its leverage ratio to 74% in H1 2021 from 68% in H1 2020. For every N1 in equity, ABC Transport owes N0.74k. During the session, debt surged by +37.21% even though fixed assets declined by -10.09%. However, the -30.13% decline in financing costs suggests that the company used this loan to offset its interest expense (see chart 10 below).

 


Chart 10: ABC Transport debt-to-equity ratio H1 2017 - H1 2021

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Source: ABC Transport Financial Statement, Proshare research



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Efficiency


Non-current Asset turnover

The fixed asset turnover of the company has declined steadily from 1.15 in H1 2017 to 0.92 in H1 2021. This indicates that the capacity of ABC Transport's fixed assets has not been maximized in the past five years. The H1 2021 result of 0.92 reveals that each N1bn invested in its fixed assets generated sales worth N92mn (see chart 11 below).

 


 

Chart 11: ABC Transport Fixed assets turnover H1 2017 - H1 2021

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Source: ABC Transport Financial Statement, Proshare research

 

Current Asset Turnover Ratio

ABC Transport's current asset turnover has rapidly declined to 1.14 in H1 2021 from H1 2017's 2.41. The current asset turnover ratio depicts the capability of the firm to maximize its earnings with the minimum investment in its short-term assets. Thus, the company generated N1.14bn worth of sales revenue for every N1bn invested in current assets in H1 2021 (see chart 12 below).

 

Chart 12: ABC Transport Current Asset Turnover H1 2017 - H1 2021

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Source: ABC Transport Financial Statement, Proshare research

 

Improved profitability rec0rded in H1 2021 shows minimal signs of recovery for the transport company. However, worsening liquidity coupled with the -75.21% decline in earnings per share to N5.91 in H1 2021 will drive investors away due to fear of the company's imminent insolvency pending H2 2021 results.



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