CSCS: grappling with economic performance


Friday, November 20, 2015 3:30PM / GTI Research

Investment Highlight: 9 Months 2015: Market decline scrapes earnings
Central Securities Clearing System (or the “Company” or “CSCS”) Plc, released its unaudited Financial Statement for the period ended September 30, 2015 in October 2015. Total revenue declined by 7.58% to ₦5.68 billion ($28.83mn) from ₦6.14 billion ($31.42mn) Year-on-Year (YoY). Profit after tax (PAT) also declined by 10.83% to ₦3.36 billion ($17.05mn) from ₦3.77 million ($19.13mn) YoY. The Company battled with expenses which rose by 16.17% leading to a decline of 18.76% in profit before tax. Expense to revenue ratio grew to 28.31% in Q3 2015 compared to 22.52% in previous year. Cost to revenue ratio also grew in the period under review.

Trading activities on the Nigerian Stock Exchange reduced significantly YoY with total deals reducing from 936,697 deals to 771,706 deals (17.61% decline). Q3 2015 YTD showed value of trades at ₦829.21 billion as against ₦1.021 trillion (18.82% decline) for comparative period in 2014.  Interest income grew by 25.38% compared to same period in 2014 while the Company’s operating profit margin declined to 71.69% compared to 77.48% in 2014.  We have reviewed our two years forecast (2015 and 2016) which reflects decline in 2015 due to reduced trades in the capital market and slowing economic performance.

Valuation Analysis
Based on our analysis, CSCS Plc is currently undervalued. It is trading at a discount to our estimated fair value of N6.79 with a 12Month investment horizon. In arriving at our fair value for the stock, we focused on the historical financial performance of the stock and our expectation for FY 2015.

Our fair value for CSCS shares was calculated using the Dividend Discount Model (DDM) comprising our expected dividend consideration for the Company and GTI Securities customized tweak to adjust for the risk of investing in Nigerian. Our Required Rate of Return (RROR) factors in a risk premium of 12.50% and the yield for the most recently issued 20-Year FGN Bond was applied as the risk free rate of return.

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