Transcorp Plc saw its profit before tax for the first quarter (Q1) 2023 take a 63% plunge as foreign exchange (FX) losses on financing activities rose 381.03%, cost of sales rose 12.44% and revenue edged up by a weak 3.2% (see Table 1 below).
The company’s result is coming at a time major boardroom and stakeholder decisions are being made as Nigeria’s burly energy czar, Femi Otedola, makes a play for influence in the conglomerate, targeting its energy and power business.
In a recent commentary, Proshare analysts pointed out that the Chairman of Geregu Power Company signalled his intentions for a bigger play in Nigeria’s emerging private-sector-driven energy market with the purchase of a 5.52% stake in Transcorp Plc with eyes focused on the conglomerate’s energy plants in Ughelli and Afam which produce a combined 2,000MW of power.
The Q1 2023 results of Transcorp are not likely to endear the management of the company to the new significant stakeholder as Otedola is known for his aggressiveness in intervening in companies that lack intent, rather than capacity, to meet what he considers to be decent investor returns. The presence of Otedola in Transcorp could whip up a storm as the hardnosed investor pushes the company to improvements in both profitability and operational efficiency.
Transcorp’s business ratios have been hesitant. Profit margin fell between Q1 2022 and Q1 2023. Equity returns equally took a knock as earnings per share was sliced to half (see Table 2 below)
Transcorp’s Pricing Binge
Transcorp’s share private movement has been tepid in 2023 but a spike seems to have occurred in the last two weeks when Otedola to market action to buy into the company. Whether this price gain is sustained will depend on how much the Maverick new investor influences cost reduction and revenue increases and particularly breaks rising foreign exchange losses (see chart 1 below).
All About the Power
With strategic investors like Otedola looking over the Transcorp management’s shoulders, very few would envy those steering the corporate ship as the Q1 2023 result would come under closer scrutiny. With two-thirds of last year’s earnings being chalked off the profit log in Q1 of the present year, Otedola’s spider senses would have been activated and he would likely see to it that areas of operational fat are cut, while improved foreign exchange management strategies would be adopted to reduce if not prevent profit flattening by exchange rate translation challenges.
The power prince would likely call for foreign exchange hedging arrangements to trim losses in coming quarters. With other investors getting prepared to jump into the fray, management will have to step up to deal with the rising cost of sales which rose 12.44% between Q1 2022 and Q1 2023; and the company’s negative working capital in Q1 2022 and Q1 2023. While on the positive side, negative working capital fell from N98bn in 2022 to 94bn in 2023; the conglomerate’s working capital turnover, a measure of working capital to its revenue, rose from -2.9 in Q1 2022 to -3.1 in Q1 2023. The fall in negative working capital is a move in the right direction but still puts strains on Transcorp’s liquidity. Management may want to take a second look at the company’s short-term or current assets and current liabilities to see if working capital could be improved over the next three quarters.
The company’s debt rose by 0.71% year-on-year (Y-o-Y). In Q1 2022 hospitality and energy conglomerate’s total debt was N104bn but rose to N103.9bn in Q1 2023. Debt-to-equity in Q1 2022 was 0.68 but fell to 0.66 in Q1 2023, suggesting that the group’s debt-to-equity was within healthy borders and some headroom exists for the conglomerate to take on more debt and improve return on shareholders’ equity. The critical issue would be that the additional debt should offer market opportunities in funding projects with positive net asset values (NAVs) and internal rates of return (IRRs) better than current businesses.
End Note
Transcorp’s Q1 2023 result is a map of prevalent business conditions of the entity at the start of the year and gives strategic investors grist to push for readjustments of management policy and strategy. The corporation’s hospitality business appears to be doing well, but for savvy investors, the diamond in the crown is the power segment of Transcorp’s operations and analysts expect that this is where investors pay special attention.
The share price of Transcorp will rise over the next couple of days as the gladiator’s battle for supremacy, but market corrections will be expected when both parties call a truce and agree to sheath their swords and close their wallets to allow the company to stay focused on making energy sector money for its shareholders.
There are unconfirmed indications that Elumelu, late on Monday, April 17, 2023, upped his equity interest in Transcorp to begin a countervailing move to stay in control of the corporate giant. If market intelligence is to be believed, the Chairman of the UBA banking group, will match the stakes of new investors in Transcorp.
At this point, the market regulators (NGX and SEC) may need to keep a close eye on market developments to ensure that the white heat of the war for corporate control does not burn minority shareholders and the company’s operating interest.
With the Q1 2023 results on Transcorp Plc showing operating weaknesses, the battle for the soul of the company must take it to heaven and not hell as regulators provide benediction to force out demons of unrestraint.
