Eromosele Abiodun writes that the recent upsurge in the share price of Transnational Corporation of Nigeria (Transcorp) Plc may be difficult to sustain considering the underlying fundamentals

When benchmarked against the Nigerian Stock Exchange’s All Share Index (ASI), the conglomerates sector generally underperforms, given the average return from the equities market in recent times. AG Leventis, Chellarams and SCOA Nigeria Plc cannot be said to be among the best performing stocks in the market. However, Transnational Corporation of Nigeria (Transcorp) Plc has bucked the trend that appears to be heralding the resurgence of the conglomerates.

The price of Transcorp shares closed at N1.46 per share last Friday. It was the first time the company’s share price had moved above the N1.00 mark since 2011 when Heirs Holding Limited, owned by former Managing Director of United Bank for Africa Plc, Mr. Tony Elumelu, bought into the company. At the time, Transcorp added about N22 billion to investors’ value, posting a year-year-to-date return of 149 per cent so far.

But in the first quarter of 2012, it recorded a negative year-to-date return of 8.77 per cent or a loss of N1.3 billion within the three months ended March 31, 2012. The second quarter of 2012 saw a significant capital appreciation as the conglomerate released early fundamentals and forecasts for 2012. Two and a half months after, Transcorp recorded a capital gain of N23.23 billion, which altogether placed the conglomerate within the top bracket of the best-returning stocks for that period.

Recent Acquisitions
An assessment of the stock shows that its recent performance was due largely to the news of its acquisition of Ughelli Power Plant, one of the electricity distribution companies spurn out of Power Holding Company of Nigeria (PHCN). The plant has been renamed Transcorp Ughelli Power Plc (TUP). TUP is a subsidiary of Transcorp, which also has strategic investments in the hospitality, agribusiness and oil sectors.

Last week, the company notified the NSE that it had signed a framework agreement with General Electric (GE) to address the infrastructure needs in Nigeria, with emphasis on the power and transportation sectors.

GE, a global leader in the design, manufacture, supply, installation and maintenance of technology and services for the power sector, confirmed its commitment to facilitate the generation of 10,000MW of additional power in Nigeria over the next decade in line with its existing agreement with the Federal Government of Nigeria (FGN), signed in March 2012.
Is the Rally Premature?

While the demand for Transcorp shares has been influenced by high expectations from TUP and other strategic business initiatives, some analysts believe it would take a long time for it investment in the Ughelli power plant to yield returns. Besides, experts said investors might be celebrating too early given the fact Transcorp is yet to conclude payment for the Ughelli power plant.

According to them, sourcing for funds to pay for TUP will be another challenge going forward. It is believed that even if the company strives to pay for the power plant, there are several electricity market issues that still need to be sorted out, including raising funds for the total overhaul and replacement of the Ughelli plant.

Add to this the issue of labour, where the workers have to be settled. The labour issue has been one of the major problems the Federal Government has had to contend with under the power reform programme. Also, there is the issue of the host community to be resolved. The only advantage, analysts said TUP has is its location, which is close to the source of gas supply.

Also, a division of Transcorp’s hospitality business – Transcorp Metropolitan Hotel, located in Calabar, Cross River – remains unprofitable and there is no clear roadmap on the conglomerate’s plan to commence construction of the Transcorp Hilton Apartments and Suites in Abuja, which it announced a while back. In addition, it is believed that its agri-business is yet to yield significant returns while the oil blocks that it acquired from inception are yet to contribute to Transcorp’s bottom line.

Troubled Past
Incorporated in 2004, Transcorp was touted as the next frontier of Africa and Nigeria’s investment drive in the global economy. More than five years after it raised several billions of naira from investors with the promise to be the pride of shareholders, Transcorp is still yet to deliver commensurate return to shareholders. Listed in November 2006, Transcorp’s share price leapt from N7.50 per share to close the year at a high of N9.71.

The next year, Transcorp closed at N3.14 per share, seven kobo above its lowest market consideration of N3.07 during the period. Thus, Transcorp returned full-year loss of 67.7 per cent to shareholders in its first full year on the stock market. By the time the entire capital market caught the cold from the global financial and economic crises and took a beating after the domestic asset bubble bust in 2008, Transcorp had been stripped down to its nominal value. In 2010, the conglomerate dipped from 57 kobo to close at a low of 50 kobo. However, the story changed in 2011 after Heirs Holding acquired the company.

Turning the Bend
To be fair, recent audited and interim reports of the conglomerate have shown a stable and reassuring positive outlook, allaying fears that had built up after years of mindboggling losses. Transcorp posted a loss of N9.1 billion within the eight-month period ended December 2006. In 2007, the loss after tax stood at N8.93 billion while investors contended with net losses of N6.70 billion in 2008. It however broke the cycle in 2009 with a net profit of N1.2 billion. It has since consolidated on the positive bottom-line.

The audited report and accounts for the year ended December 31, 2011 showed that turnover rose from N13.93 billion in 2010 to N14.08 billion in 2011. Profit before tax and exceptional items stood at N3.5 billion as against N4.1 billion in 2010. After exceptional items, profit before tax moved from N6.91 billion to N3.5 billion while the company’s profit after tax closed 2011 at N4.67 billion as against N5.39 billion in 2010.

Transcorp’s unaudited report for the first quarter ended March 31, 2012 also showed an appreciable improvement in profitability. While turnover dropped marginally from N663.81 million in first quarter of 2011 to N514.84 million by first quarter of 2012, profit before tax closed the first three months of 2012 at N610.12 million compared with N399.07 million in comparable period of 2011. Profit after tax also improved from N319.26 million to N518.61 million.

Future Prospects
Meanwhile, the board of Transcorp is optimistic the conglomerate would continue on a stable growth path and build on the current momentum to ensure good returns to shareholders. Speaking at its annual general meeting (AGM) held in Abuja last year, chairman of the board, Elumelu, said the company has commenced the execution of its expansion plans to fully utilise the massive unutilised land on its Transcorp Hilton Abuja site and roll out new hotels across major economic centres in Nigeria such as Lagos and Port Harcourt.

He added that the conglomerate has also signed a partnership agreement with Symbion Power, a US-based energy company, to engage in a power production venture, which would lead to a significant increase in power production for the benefit of the nation.
According to him, the conglomerate took several significant steps in its key sectors of agri-business, energy and hospitality – that would no doubt see Transcorp taking its rightful place as a key player in the economic development and transformation of Nigeria. He said Transcorp’s agri-business subsidiary, Teragro Limited, has the annual capacity to process 26,500 metric tonnes of oranges, mangoes and pineapples, turning them into juice concentrates that will be supplied to ready-to-drink juice manufacturers in Nigeria and beyond.

“This plant will contribute tremendously to increased employment, the utilisation of local produce, as well as serve as a domestic supply substitute for indigenous manufacturers. I am excited and optimistic about Nigeria’s coming of age. Now is the time to become fully engaged in transformational investments that create economic prosperity and social wealth by increasing employment and enhancing the quality of life for all Nigerians,” Elumelu said.

Source: Thisday