UNITED CAPITAL: MIXED Q3 NUMBERS IN ABSENCE OF EXTRA-ORDINARY INCOMES

United Capital Plc, Nigeria’s only listed Investment banking giant recently released its nine-month earnings report for the period ended September 30, 2017, with mixed performance with the top line looking north and bottom-line pointing the opposite direction- south, despite the relative improvement in the economy and the investment environment that had impacted positively on returns so far in the year.

The company’s performance on quarterly basis have been below the numbers posted in 2016 which had kept its price performance moving relatively sideways after the May rally.
United Capital has done well in its core operational areas of investment banking, trusteeship, asset management and securities trading as shown by the investment and trading income for the period under review. These were aggressively driven by robust technology, marketing and product innovation to deliver satisfactory services in an efficient manner, while ensuring cost is under serious management, to boost profitability.

The company’s under performance since the beginning of the current financial year, when compared to 2016 had reflected in the scorecard, with gross earnings managing to inch up by 9.67% to N6.24bn from N5.69bn in 2016. This was significantly boosted by returns on investment and net income from securities’ trading which is the core service area of the company.  But profitability level for the period was down by 30.43% to N3.27bn from N4.7bn in 2016 on the back of an absence of extraordinary income that contributed about 33% in 2016.

In addition to the absence of extra-ordinary income, the total expenses for the period was up by 35.55% and was essentially due to the 38.4% increase in operating cost and overhead by 30.3%.
This was despite the high risk in the financial market environment, especially in a recovering economy where the effect of recession continues to linger, added to the fact that the highest spender- government is not judiciously implementing 2017 budget because its revenue projections are lagging behind. 

The unstable performance in UCap’s financials so far in the year has kept its share prices trading at N3.04 each, which is about 24.39% above it price of N2.46 at the release of its report in 2016.
The stock is currently trading above its book value by 19.69%, which indicates unfairly priced situation that calls for discernment at this point on the part of investors.
The company’s book value currently stands at N2.54 and Price to Earnings Ratio is 1.87x, which means investors' waiting period has increased from the 1.09x in the corresponding period of 2016. 

                                                         

SOURCES: COMPANY DATA & INVESTDATA RESEARCH

Valuation/Recommendations
The company’s oscillating earnings is a major source of concern to stakeholders, especially the decline in return on equity which shows that for every 100 kobo provided by shareholders, 22 kobo was returned as profit, down from 36 kobo in the corresponding period of 2016, even when there was an improvement in the nation’s economic fundamentals in support of investment. However, the company’s current Book Value at N2.54 per share and profit margin of 52.47% is good, but investors expect equalization dividend to support price on the strength of its Price-Earnings-Ratio of 1.87x, which is relatively okay in the market, just as Dividend Yield at 16.45% is attractive, as it is above the nation’s current inflation rate of 16.05%.

The company has consistently paid dividend since 2013 and on the strength of its numbers for Q3, the chances for another dividend payout at the end of the year is high. The management's commitment to deliver outstanding services to drive performance will support price in the long run. Based on this reality, we advise investors in the stock to BUY for long and if you are there for dividend income, increase your stake as the year winds down gradually. 
The possibility that the director would offer dividend of between 35 to 45 kobo is high.

Technical View
 

UCAP’s price action on daily time frame has formed a symmetrical triangle chart pattern that supports continuation of trend in upward or downward direction depending on market sentiments, especially after this stock had side-trended for five months.  Traders should wait for a breakout of the blue trend line before buying, as well as reversal to first support level at N2.88 each and second support price of N2.48. The strength of the trend is weak given that ADX is below 20 points
History

United Capital Plc was established in 2002 and listed on the exchange in 2013 to provide financial services through its investment banking, Trustees, Asset Management and Stockbroking divisions. The company's capacity building and technology–driven business has supported its status as a one-stop Investment shop.

It was then fully owned by United Bank for Africa Plc before being quoted on the NSE, thereby becoming a publicly owned company with its own shareholders. Its excellent service delivery in helping governments, corporate organisations and individuals to achieve their financial goals in the financial market continues to support its strong performance.

Its 17 years of active participation in helping to deepen the Nigerian Financial Market has afforded the company opportunities to participate in various offers, including financing of projects, financial advisory service, packaging of Initial Public Offerings, Right Issues, Debentures, as well as corporate and government bonds

Performance Analysis
The company's performance for the four-year period (2013 to 2016) reveals that the management has surpassed forecast and projection it gave while company was being listed on the exchange, given its consistent growth in earnings and rewards to shareholders.
Within the period, for example, United Capital Plc has consistently grown gross earnings and other profitability ratios. 

Gross income for the period grew by 96.94% from N4.57bn to N9bn in 2016, also profitability level moved significantly, from N1.76bn in 2013 to N6.91bn, a 292.61% increase. This is very much in line with the commitment of management to grow earnings and manage cost as reflected in its profit margin for the review period, as it remains above the 15% international standard.
Net assets currently stand at N14.23bn from N8.38bn in 2013, revealing an uptrend in the last four years.

The company has paid a total dividend of N1.30 per share since it became a quoted, a function of its strong earnings position for this period, but the recent two-year improvement in payout calls for more inputs to sustain the tempo by consistently growing earnings power.

SOURCES: COMPANY DATA & INVESTDATA RESEARCH

Estimated Performance Ratios
Performance ratios for the period under review shows that the amount earned per share was significantly better at 115 kobo, than the 29 kobo in 2013 when it became a public company, after which it increased yearly from 31 kobo in 2014; to 43 kobo in 2015. This is a reflection of the stable and up-trending earning power in an unstable-risk financial market. This shows how resilient the company has remained over the years.

Price Earnings ratio is okay and attractive at the current estimate of 3.20x from a high of 8.68x in 2013. The last full year EPS is a yield of just 31.23% of the market price as of the release date. This simply signifies an improvement in the stock's valuation by the market as against the posted numbers.

The Book Value moved from N1.40 in four years to N2.37 as the share price equally moved from the price of N1.30 as of listing date to N3.82. The enhanced Book Value for the period resulted from the company improving upon and retaining some of it its earnings which moved from N6.72bn in 2013 to N13.25bn, which supported shareholders’ funds tremendously.   Putting this ratio and the market price of the stock side-by-side, signals opportunity for medium and long term investors. Also, the company’s profit margin over the years has improved as management effectively controlled cost to boost profit. 
           

SOURCES: COMPANY DATA & INVESTDATA RESEARCH