Transcorp Plc reports strong first half 2024 results; stock appears undervalued

Transcorp Plc has once again drawn significant attention with its strong performance in the first half of 2024, showcasing impressive growth and reinforcing market confidence.

In the first half of 2024, Transcorp reported an impressive 283% increase in profit before tax, reaching N70.92 billion. This increase not only exceeded the company’s full-year pre-tax profit for 2023 by over 20% but also drove the pre-tax profit margin up to 40.43%.

This substantial boost in profitability was largely fueled by strong revenue growth, particularly from the power segment, which constitutes over 80% of the company’s total revenue.

Tony O. Elumelu, CFR, Group Chairman of Transcorp Group, emphasized the significance of this segment, stating, “In power, our generating capacity and output continue to increase, the turnaround at AEDC is beginning to bear fruit, and we are innovating, with our recent commitment to embed power in Abuja, bringing our vision of an integrated energy business ever closer.” 

Revenue for the first half of 2024 reached N175.43 billion, reflecting a 114% year-on-year increase, adjusted for the elimination of inter-segment revenue of N16.79 billion.

This elimination pertains to the dividend income from Transcorp Power Plc and Transcorp Hotels Plc to Transnational Corporation Plc, ensuring a more accurate representation of external revenue.

The robust revenue growth translated into a 98% year-on-year increase in gross profit, reaching N85.478 billion, with the gross profit margin standing at 48.7%.

Despite being slightly lower than the 55.41% margin recorded in the same period of 2023, this margin remains healthy. The decline in profit margin can be attributed to a higher cost of sales, which grew by 131% year-on-year, outpacing the 114% revenue growth.

This increase in the cost of sales, driven by rising natural gas and fuel costs, which constituted about 63% of the total cost of sales in 2023, has put pressure on the profit margin.

Further bolstering the company’s bottom line was a strong operating profit of N76 billion, supported by additional income of N12 billion.

This contributed to an operating profit margin of 43.88%, up by 742 basis points from 36.46%.

This sustained and increased margin, surpassing those of 2022 and 2023, is particularly notable in the power sector, where operating costs are substantial.  It highlights Transcorp’s operational resilience and efficiency amidst macroeconomic challenges.

The company attributes this success to its commitment to operational excellence, strategic management of its portfolio, and innovation.

Commenting on the first half year 2024 results, Owen Omogiafo, OON, President/Group Chief Executive Officer of Transcorp Group stated: “Our outstanding first half year 2024 performance is a demonstration of our resilience, relentless execution, and dedication to operational excellence, despite challenging macro-economic factors. Transcorp Group and its subsidiaries remain firmly committed to delivering exceptional and long-term value to our stakeholders.” 

Moreover, this robust operating profit margin provides the company with a solid cushion to cover its interest expenses, which is crucial in assessing financial risk.

Transcorp’s interest coverage ratio, a key indicator of its ability to meet interest obligations, significantly improved to 10.8x in the first half of 2024, up from 3.2x in the full year of 2023.

This improvement increase indicates a reduced financial risk and suggests that Transcorp is now in a much stronger position to service its debt, with earnings comfortably covering interest expenses multiple times over.

Such a high coverage ratio not only reduces financial risk but also enhances the company’s creditworthiness, potentially leading to more favourable borrowing terms in the future.

The company has also shown improvements in asset utilization and leverage. The asset turnover ratio rose by 81% to 0.28x, indicating more efficient use of assets in generating revenue.

The equity multiplier decreased by 5.8% to 2.67x, reflecting a reduction in financial leverage. Although the company’s debt profile increased marginally by 1.05% to N104.5 billion, the modest growth suggests that Transcorp is not overly reliant on debt to drive its growth.

This balanced approach has contributed to a significant increase in return on equity, climbing to 23%, a 162% rise compared to the first half of 2023.

Transcorp’s share price has gained 26.4% year-to-date (YtD) as of August 19, 2024, though this is lower than the 64% YtD gain reported in Q1 2024 and the 666% YtD return seen in 2023.

The slowdown in share price growth could reflect a market reassessment of the company’s valuation following a period of rapid gains or broader market conditions.

In terms of valuation, Transcorp’s ratios are notably lower than industry averages. The price-to-earnings ratio of 11.37x is significantly below the industry average of 64x, indicating that the stock may be undervalued relative to its earnings.

Similarly, lower price-to-sales (1.53x vs. 14.72x), price-to-book (2.77x vs. 38.75x), and price-to-free-cash-flow ratios (13.58x vs. 45.69x) suggest that Transcorp’s stock is priced more attractively compared to industry peers.

• This means that the stock could be trading at a lower price relative to its earnings, sales, and other financial metrics compared to industry peers.
• This often suggests that the stock might be undervalued, meaning it could be a good buying opportunity if the company’s fundamentals are strong and prospects are positive.
• The lower ratios might also indicate that investors have concerns about the company’s future performance or current challenges. For instance, it could reflect worries about management decisions, market competition, or other risks that might not be immediately apparent.

It is essential for investors to investigate further to understand whether the lower ratios are due to these concerns or if they represent a genuine opportunity for investment.

Overall, Transcorp Plc’s first-half 2024 results highlight strong profitability and financial health, despite some pressures on margins and a moderated share price performance.