Transcorp 1H15 results – net profit falls 38%, but will grow 200% for the full year!

Transcorp released its 1H15 numbers with revenue down 4%, cost of sales growing by 29% and net profit falling by 38%. To an outsider, might seem like one set of awful financials, but not to us.

So, why we are bullish and still think that Transcorp net profit will growth 3 (three!) times YoY for the full 2015:

1. Second half of the year 2014 was tampered by numerous factors, including FX revaluation (biggest single factor) and hotel business slowdown on the back of regional Ebola outbreak, spooking tourists.. As a result, despite 1H14NGN6.9bn net profit, for the full year, the company reported only NGN3.3bn of net profits. This year, should be different – while FX revaluation is still possible, as of April company started to receive higher capacity payments, hotel business recovers, hotel business managed to pass through some of FX deval effect into room rates. So company’s NGN4.3bn 1H15 can easily be projected for the full year and even more. We expect NGN10bn for the full year, 1H15 numbers were 43% of that with major growth drivers into the second half.
2. Costs – very well controlled. 1H15CoGS were NGN8bn, we expect NGN17bn for the full year, admin costs in 1H15 stood at NGN5.6bn – we expect NGN13.6bn for the full year. Reported costs are noticeably below our expectations, and that gives hope that with revenue recovery into the second half – results can exceed even our expectations.
3. Liabilities are falling – from total net debt of NGN40bn at the end of the 1H14to NGN45bn at the end of last year to only NGN32.8bn at the end of 1H15. Obviously at times of FX volatility, company delays its expansion plans (actually we like it as oppose to Transcorp taking dollar debt and gets FX revaluation at year-end) and makes it balance sheet healthy. IF you take 1H15 numbers and annualize it, Transcorp net debt/EBITDA declined from 2.5x at the end of last year to only 1.6x currently. All the local investor fears of high debt burden for Transcorp are unrealized.

So, the reported numbers might not impress at face value, but look behind the figures – there is value hidden. Obviously Tanscorp is very exposed to NGN devaluation, but the stock is trading currently on EV/EBITDA of only 4.7x – twice cheaper than HUB Power and K-Electric, 50% discount to international peers. If there is something you want to pick up once situation stabilizes, Transcorp should be on your radar.