Performance
Trans-Century
Limited (TCL) was listed on the NSE in July 2011 to become the largest
investment group by assets on the Nairobi bourse.
The
group reported a 37.85% increase in pre-tax profit.
A
convertible bond of USD 54,270,000 (roughly KES 4.73 billion) was issued
through a Mauritian subsidiary to finance what we witness to be a rapid
acquisition of other subsidiaries and unquoted investments. This has led to
TCL’s asset base nearly doubling within the year to stand at KES 21.74 billion,
with major increases being traced to goodwill on acquisition (intangible assets
up by 453.50%), assets acquired on acquisition of subsidiaries (PPE by 55.84%)
and unquoted investments (up by 99.52%). Cash flow from operating activities
has tripled to KES 1.85 billion, a movement probably attributed to healthy
subsidiaries’ cash flows.
Corresponding
growth in revenue and profits is, however, not as euphoric. TCL has achieved
57% growth in revenues to KES 10.7 Billion, tied in with 32% growth in profit
after tax. Net profit margin is only 5.76%.
Debt
finances 47% of the assets, almost equivalent to shareholder’s wealth.
Bondholders of USD 3,435,000 (about KES 276.5 million) had exercised their
option to convert to equity within the year. However, in the event that the
other convertible loan holders do not convert (and it is likely they will not,
since the exercise price of conversion is KES 40.00 per share, almost double
the current share price) debt tips over to 68% of assets, which is a bit on the
dangerous side.
Operating
Environment
The
global economy has been grappling with uncertainty. This is especially so in
the Eurozone, which is one of East Africa’s major trade partner. The East
African region also experienced fluctuating exchange rates and interest rates,
accompanied by soaring levels of inflation.
On
the flipside, the region has received positive news concerning natural
resources, such as the prospects of oil and industrial minerals in Kenya and
Uganda, and gas in Tanzania and Mozambique. TCL Group could seize these
opportunities and strengthen their pillars of infrastructure: Power, Transport
and Engineering.
Investment
Analysis
Net
asset value per share without the convertible bond is KES 26.06 (and KES 42.59
with the bond) which is good news from two perspectives: it has risen from KES
19.82 in 2010, and the figure is above its current trading price of KES 22.75
(25th April). This is only marginally above its 52 week low of KES
20.00.
Dividend
of 25.0 cents up from 20.0 cents gives an increasing real share of profit to
investors (unlike its peer, Centum, which has not issued dividends since 2008).
However,
EPS increases by only 2%. Dilutive potential has been introduced by the convertible
bond. It is an expensive stock with a P/E ratio of 18.5. The share price is
near its highest point this last month.
Recommendation
The
share is trading at a discount; therefore as market fundamentals take shape, it
is a good long-term buy. It could be argued that it has a high potential
for growth since it has only recently began trading.
The
main problem is that trade volumes on this counter are very low. Even a single
significant trade has the potential to affect its price.
Quote:
"Never
take life too seriously. Nobody gets out alive anyway."
