Transcorp Plc: Power sector challenges pose a drag

LAST week on this column we examined the future of Forte Oil Plc against some restructuring issues relating to its power sector businesses. The firm had suffered investor backlash in the Nigerian Stock Exchange despite its impressive full year 2017 and first quarter 2018 results. Many analysts had attributed the backlash to the difficulties the company was facing in its power business, a situation which forced it to begin divesting from the sector. From L-R: •Mr. Valentine Ozigbo, CEO, Transcorp Hotels and •Mr. Abdulqadir Jeli Bello, Chairman, Transcorp Hotels Transcorp Nigeria Plc, on the other hand, is much more into power sector business. The company had turned in impressive financial results for the full year 2017 (FY’17) and first quarter 2018 (Q1’18), but the stock received hard knocks, depreciating 11.4 percent, far beyond what market observers had attributed to the general bear run bandwagon. But the company’s power sector was doing well going by the latest results. Transcorp’s power segment recorded an impressive 50.8 percent year-on-year (YoY) and 76 percent YoY revenue growth in its FY’17 and Q1’18 results respectively. This further consolidated the segment as the mainstay of the firm, contributing 85.6 percent (Q1’18) of total revenues. Outstanding receivables However, same as with Forte Oil, liquidity constraints experienced in the sector persists and investors are uncomfortable. Trade debts are mounting. Outstanding receivables to the firm had accumulated to N84.4 billion by end of Q1’18. It rose to N77.8 billion at end of 2017, up from N48.2 billion at end of 2016. Analysts have noted that this development is more worrisome when considered with last year’s initiative by the Federal Government to ease the burden on Power Generation Companies (GENCOs) through the implementation of the N701 billion Payment Assurance Plan (PAP), an intervention fund which guarantees payment of up to 80 percent of invoices due to the GENCOs. In fact, Transcorp’s management had noted that they have only been able to receive full payments from the Nigerian Bulk Electricity Trading Plc (NBET) for 2017 invoices, up to July 2017. This means that payments for subsequent months have fallen short. Data from NBET reveals that in the months of January and February 2018, respective payments to GENCOs amounted to only 12.62 percent and 42.99 percent of total invoiced figures for electricity supplied. Beyond this, concern also builds on whether, and when the firm, along with other GENCOs, will be paid outstanding amounts for the legacy debts prior to January 2017, as the PAP was established to cover invoices that accrue within the period January 2017 – December 2018. While Transcorp’s management has noted that engagement is on-going with the Federal Government regarding this, industry analysts are sceptical that a quick end is in sight, thus exacerbating the current liquidity concerns plaguing the power sector. Beyond the power segment, analysts had expected Transcorp to be buffering with its hospitality segment. But this segment declined by 9.6 percent YoY, largely impacted by the temporary closure of the Abuja airport early in the year, as well as the upgrade of the Transcorp Hilton Hotel Abuja. However, despite these bottlenecks, Transcorp was able to achieve a 63 percent occupancy rate as against 59 percent recorded in 2016. Looking ahead, it is believed that the company may be coming out of these headaches as the facility upgrades is also expected to be completed by end of next quarter. Following the upgrades, management has hinted that it will re-price some of its rooms upwards, though this may also pose the risk of dampening the growth in occupancy rate. But on the contrary, the management expects occupancy level to increase to 70 percent as a result of the upgrade. Also it expects occupancy rate at Transcorp Hotels Calabar to improve to 65 percent, up from 57 percent recorded in 2017. Stretching the positive expectations it has been noted that growth of the hospitality industry is positively correlated with the economic cycle. Thus, observers believe that Nigeria’s recovery from recession holds positive implications for hotel businesses owing to improving macro-fundamentals. Thus, beyond room occupancy, it is also expected that revenue growth will come from increased utilization of its facilities for events hosting and more. Notwithstanding expectations of impressive top line and bottom line performances for FY’18, analysts at Cardinal Stone Partners, a Lagos based investment house said they are worried about the firm’s liquidity and solvency levels which have both deteriorated over a five-year period. Liquidity and solvency levels They stated: ‘‘TRANSCORP’s current ratio weakened from 1.73x in 2013 to 0.90x in 2017. Likewise, quick ratio declined from 1.12x to 0.85x during the same period. ‘‘Over the long term, we observe subtle increase in the firm’s debt-to-asset ratio, indicating growing limitations to its financial flexibility. ‘‘Although at 0.39x, we do not think this is significant yet. Instead, our real worry builds from TRANSCORP’s troubling debt-to-equity, net debt-to-EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) and solvency ratios. ‘‘Critically, we point out that TRANSCORP’s debt-to-equity ratio has risen rapidly over the past 5 years (from 0.5x in 2013 to 1.2x in 2017), indicating increasing reliance on debt to finance operations. ‘‘Similarly, we note the high net debt-to-EBITDA ratio which has averaged 2.83x over the past 5 years, compared to 1.63x in 2012. More so, a solvency ratio of 7.4% (5-year average – 7.3%) further aggravates our concern, given it is significantly lower than our 20.0% comfort level. ‘‘Following adjustments to our projections, we have revised our price target downwards to N2.01 (previous: N3.05). At N2.01, our target price represents a 33.1% upside to last close price of N1.51.’’ The analysts retained the ‘BUY’ rating on the Transcorp stock.