Can Transcorp achieve a profit rebound at full year?

Transnational Corporation of Nigeria is showing a pattern of profit rise and fall that leaves its earnings outlook uncertain. Over the past five years, the company has recorded alternating rise and fall in profit performance, quite unexpected of a conglomerate. Will the company rise this year after the fall of last year is the big question mark on Transcorp in 2015.

The company has actualized new investments in power, oil and gas and agriculture, which saw a leap of 120% in revenue in 2014 – the strongest growth in sales volume since 2009. That isn’t creating the much needed earnings stability yet. After tax profit fell by more than one-half in the year. This year, the company lost revenue at the end of the third quarter and profit dropped by over 28%.

There is a chance that the company will end the current year with a profit rebound as well as a possibility that it may not. At the end of the third quarter last year, Transcorp appeared to be on the way to posting the biggest profit ever in its operating history. The optimism however faded at full year when profit fell from N8.26 billion in the third quarter to N3.30 billion at the end of the year. Whether the final quarter disappointment will repeat itself this year is the caution on Transcorp.

The company closed third quarter operations with sales revenue N30.42 billion, a decline of 3.1% year-on-year. The full year outlook indicates a turnover in the region of N42 billion for Transcorp in 2015. That will be a flat growth on the N41.34 billion sales revenue the company earned in 2014. Revenue growth accelerated in the past two years from 42.1% in 2013 to 119.7% in 2014 but the momentum is expected to be broken in 2015.

After tax profit amounted to N5.88 billion at the end of the third quarter, a drop of 28% from the N8.26 billion the company posted in the same period last year. It is however 78% above the full year profit figure in 2014. The company’s last quarter operations last year ended in a big loss, which lowered its net profit to N3.30 billion at full year. If the third quarter growth rate is maintained, it is expected to earn over N8.0 billion in after tax profit at the end of 2015. This will be a major rebound of 142.4% and a new peak in the company’s trading history.

The year-on-year drop in profit is explained by two major rising costs – cost of sales and interest expenses. Against the 3.1% decline in sales revenue, cost of sales grew by 19% year-on-year to N12.28 billion. That caused a drop of 14% in gross profit to N18.18 billion, lowering gross profit margin from 67.2% to 59.7% over the review period.

The other major cost increase is net interest cost, which grew by 45.5% year-on-year to N3.85 billion at the end of the third quarter. The company therefore devoted a significantly increased share of revenue to interest expenses during the period. Short-term borrowings have more than doubled at N21.57 billion while long-term debts went down by 10.7% to N33.17 billion. New borrowings were needed to meet financing activities mostly loan repayment and interest expenses.

The company lost profit margin during the period, as costs grew while revenue declined. Net profit margin declined from 26.3% in the third quarter of last year to 19.3% at the end of September.

The company earned 7 kobo per share at the end of the third quarter, down from 13 kobo per share in the corresponding quarter of last year. Earnings per share is projected at 11 kobo for Transcorp at the end of 2015 against 0.0 kobo reported in 2014. Much of the after tax profit of last year was attributed to minority interest. The company paid a dividend of 6 kobo per share to shareholders for its last year’s operations.