|CardinalStone Research / firstname.lastname@example.org|
The Payment Assurance Guarantee (PAG) is expected to further improve TRANSCORP’s liquidity in H2’18. The prospect of top line growth is strengthened by our anticipated growth in generation capacity to 589 MW in FY’18 (FY’17: 421 MW). Similarly, we expect higher patronage of TRANSCORP’s hotels in H2’18, stemming from pre-election activities during the period.
The PAG to further ease liquidity challenge in H2’18
TRANSCORP’s revenue from its power business rose to N23.6 billion (+84.6% YoY) in Q2’18, contributing 84.9% of total revenue during the quarter. The monthly disbursement of the Payment Assurance Guarantee (PAG) to the generation companies (GenCos) has so far eased the liquidity constraint facing TRANSCORP’s operating environment, given that 80% of the firm’s power invoices in H1’18 was paid during the period.
In extension, the paid invoices covered 90% of the firm’s obligations to its gas suppliers. The improved liquidity is evinced by rise in the firm’s operating cash flow to N22.0 billion in H1’18 (H1’17: N11.0 billion).
However, management has noted that the PAG could be completely exhausted in the first quarter of 2019. Nonetheless, we believe that the implementation of the Meter Assets Provider (MAP) Regulation will support power sector liquidity in the post-PAG era. The MAP Regulation will help to boost liquidity in the power sector by ensuring that a pay-before-service system is instilled in the distribution of the sector.
Generation capacity growth to drive power earnings
TRANSCORP’s power business looks set to record another impressive growth in FY’18, following the steady rise in capacity generated (Q2’18: 531 MW, Q1’18: 520 MW, Q2’17: 343 MW). The consistent growth in capacity generated is largely a reflection improved gas supply to the firm as the gas suppliers are guaranteed of payment from the PAG.
However, available capacity dropped to 652 MW in H1’18 (FY’17: 701 MW) as one of the gas turbines was shut down for repairs. Operations are expected to resume at the turbine in Q3’18. In FY’18, we expect capacity generated to come in at 589 MW; thus, we envisage that revenue from the power business will climb to N93.9 billion (+41.4% YoY) in FY’18.
Production activities to commence at OPL 281 in 2020
TRANSCORP is currently at the stage of obtaining regulatory approvals for the exploration of its OPL 281 (with proven reserves of 174.64 MMstb of oil and 346.74 Bscf of gas). The firm anticipates that drilling activities will commence at the oil block in the first quarter of 2019. Subsequently, the firm seeks to complete the conversion of the OPL 281 to OML 281 (oil mining lease) in Q2’19.
Meanwhile, production is expected to begin at an average daily rate of about 4,000 bopd in 2020. Given its considerable proximity to the firm’s power plant, plans are primed towards the tapping of gas from the oil field for the operation of the power plant. This potential development holds the prospect of boosting the gross margin of TRANSCORP’s power business as the firm will consequently be expected to purchase less amount of gas from third parties.
Higher room prices to buoy hospitality revenue
Following the upgrade of the Transcorp Hilton Hotel Abuja, management has signalled that some rooms will be repriced upwards to reflect the newly introduced premium benefits.
Given the hospitality industry’s positive correlation with economic cycle, we envisage that patronage of TRANSCORP’s hotels will rise in H2’18 as pre-election activities begin to gain momentum during the period. Hence, we expect revenue from TRANSCORP’s hospitality business to increase by 9.2% YoY in FY’18.
Employing an EV/EBITDA relative valuation methodology alongside a sum-of-parts approach, we arrived at a target price of N2.01. This implies an upside potential of 79.5% to the last close price of N1.12. Thus, we retain our BUY rating on the counter.