Transnational Corporation of Nigeria Plc – Improved Earnings Outlook

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June 16, 2017/CardinalStone Research

In light of recent developments in the power and hospitality sector, we update our outlook on Transnational Corporation of Nigeria. We revise our target price (TP) to N3.05 and place a BUY recommendation on the counter. Kindly find key highlights below;

CBN/ NBET Upstream Payment Assurance Program
Recently, the Federal Executive Council approved a payment assurance guarantee for the power sector, which is to be provided by the Central Bank of Nigeria (CBN) as part of measures to address the protracted liquidity problems facing power generation and distribution companies in the power sector.

The Payment Assurance Facility is a N702 billion (US$2.3 billion) CBN loan to Nigerian Bulk Electricity Trading Plc (NBET), guaranteed by the Ministry of Finance (FMoF), to support NBET electricity payments to GenCos and in turn, to gas suppliers. The Payment Assurance Guarantee is for a two-year period, beginning in January 2017 and will guarantee NBET’s payment obligations to GenCos up until December 2018.

According to the Nigerian Electricity Regulatory Commission (NERC), the Nigerian Electricity Supply Industry has been experiencing a shortfall as power distribution costs have increased by 40% between 2012 and 2016 whereas average electricity tariffs have not kept pace with this increase.

This shortfall has had a detrimental impact on the energy companies throughout the value chain as the distribution companies (DisCos) have accumulated large arrears due to the generation companies (GenCos) – N470 billion (US$1.5 billion) as at FY’16. The wider economic effects of the tariff deficits were also evident as the GENCOs had difficulty in meeting their payment obligations towards financial institutions and gas suppliers.

Figure 1: Power Assurance Guarantee Structure

Power reforms to serve as catalyst
According to NBET, payments have commenced and this was confirmed from our discussions with Transcorp’s Management. Under the arrangement, the Payment Assurance guarantees payment of 80% of the GenCos’ invoice which according to management is about N3.2 billion per month.

Average monthly payments was about N1.1 billion before the new framework kicked-off. In our view, this will slow the pace of growth in outstanding receivables and reduce the negative impact on working capital. Also, with the stability in gas supply so far this year, management disclosed that capacity utilization has improved, hovering around the 60% level.

Therefore, we revise our average capacity utilisation to 57% (Previous: 55%) well above the 48% and 50% observed in FY’16 and Q1’17, and raise our 2017 revenue projection for the Transcorp Ughelli Power Limited to N59 billion (Previous: N52 billion). 

Improved outlook for Transcorp Hilton Abuja on ABV re-opening
The closure of the Abuja International Airport (IATA: ABV) had negative implications for passenger traffic and consequently occupancy levels at Transcorp Hilton Hotel Abuja in Q1’17.

According to management, average occupancy level in Q1’17 dropped to 52% (Q1’16: 64%) with a marked decline in March when average occupancy level printed at 41%. With the re-opening of the Abuja airport, traffic has improved and occupancy levels are back to normal.

Management took advantage of the downturn to refurbish some of the facilities and these facilities have been re-priced accordingly. We retain our 2017 average occupancy level at 56% (FY’16: 59%) and our FY’17 revenue forecast at N13.7 billion.

We expect an improved performance from the power and hospitality subsidiaries and revise our FY’17 revenue projection to N73 billion (previous – N67 billion), 23% growth from FY’16 revenue. Costs surged last year due to the double impact of exchange rate and inflation. With some moderation expected in inflation this year, we expect gross margin to improve to 51% from 50% in FY’16.

Barring a devaluation, net finance charges should reduce by about half and thus the company should return back to profitability. We project a net profit of N6.2 billion by FY’17 from a net loss of N1 billion in FY’16.

We have revised our target price to N3.05 (Previous: N1.00) to reflect the impact of an increase in power generation as a result of better gas supply and increased hotel revenues from ongoing upgrade. Our revised target price presents a 65% upside to current price of N1.85 and revise our recommendation to a BUY (Previous: HOLD).

Financial Statements and Key Ratios – Transnational Corporation of Nigeria Plc