Transcorp: Still losing profit but promising

Transnational Corporation of Nigeria (Transcorp) lost profit in the first quarter but the full year earnings prospects are promising a turnaround. The conglomerate could not grow sales revenue last year while finance expenses soared, cutting pre-tax profit by well over one-half. Sales revenue is picking up in the current year but rising finance cost remains a problem that is undermining the bottom line.

The company carries balance sheet debts in the region of N76 billion that are hindering the ability to convert revenue into profit. However a strong turnaround looks likely for the company should it sustain the first quarter profit growth rate in the remaining quarters of the year.

Transcorp’s best earnings year was 2013 when sales revenue made the first significant growth after some years of stagnation and profit made a high jump to hit a new peak. Since then the company has been losing profit, which dropped to the lowest mark in several years last year. The downward trend has been sustained at the end of the first quarter of the current year. The Company’s business is the investment and operation of a number of subsidiary companies in the hospitality, power, agro-allied and oil & gas sectors.

Sales revenue amounted to N13.19 billion at the end of the first quarter, which is a strong growth of 32% year-on-year. Revenue growth during the period came exclusively from ancillary services, which advanced by 179% to account for over 47% of turnover. Revenue from energy services declined and income from hospitality business improved by 12.6%.

Based on the growth rate in the first quarter, turnover is projected at N55.6 billion for Transcorp at the end of 2016. This will be an increase of 36.4% from the sales revenue of N40.75 billion the company posted in 2015. Revenue had declined slightly last year from the 2014 figure of N41.34 billion while a renewed growth is expected in the current year.

Profit for the period came to about N1.21 billion at the end of the first quarter, which is a drop of 45% from the N2.19 billion the company earned in the same period last year. The profit drop followed major increases in cost of sales, finance charges and tax expense. Based on revenue-cost outlook for the year, we expect the company to close fiscal 2016 with profit in the region of N4.6 billion. This is subject to the ability to prevent the year-on-year profit drop in the course of the year.

Rising cost of sales is a challenge – which rose more than twice as fast as sales revenue to N7.28 billion in the first quarter. That claimed almost the net increase in sales revenue and lowered gross profit margin significantly from 57.1% to 44.8% during the review period.  An increase of 4.7% in administrative expenses caused a drop of 14% in operating profit, which amounted to N3.25 billion at the end of the first quarter.

One of the biggest impacts on the bottom line came from finance cost, which rose by 24% year-on-year to N1.81 billion in the first quarter. The direct effect of the increase is a drop of 33% in pre-tax profit to N1.73 billion. Another high growth of 39% in tax expense led to a drop of 45% in net profit to N1.21 billion at the end of the first quarter. The company’s borrowings remain relatively large with long-term borrowings of close to N65 billion and short-term debts of more than N11 billion.

With the company’s large non-controlling interest, net profit to the owners of the parent company is quite insignificant at N346 million. That yields earnings per share of less than one kobo at the end of the first quarter. Based on the full year projection of profit attributable to shareholders, earnings per share is expected to stand in the region of 3 kobo for Transcorp in 2016. With a loss of nearly N588 million from changes in the fair value of available-for-sale investments last year, owners of the parent company sustained a loss of N196 million or 0.51 kobo per share.

The company’s challenge for the current year is that growing revenue isn’t flowing down to the bottom line on account of rising costs. Rising costs are coming from areas outside management’s immediate controls, indicating that profit margins will remain tight for Transcorp in 2016. Transcorp is a watch candidate this year to see whether the first quarter growth rate could lead to a turnaround or whether a year-on-year profit drops would keep profit falling for the third year running.