Custodian Investment Expects Weak Second Half On Profit

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Custodian Investment Plc expects that profit performance isn’t going to be as good in the second half of the 2020 financial year as in the first. The company’s full year earnings projection indicates that the risk underwriting firm would earn N1.6 billion in after-tax profit in the entire second half of the year. That will be about a third of the N4.5 billion after-tax profit it posted at the half year.

The second half however is expected to see a stronger performance on revenue than in the first. Gross income is projected at N73 billion at full year against N35 billion reported at half year. The second half is therefore expected to contribute N38billion or 52 percent of the company’s gross earnings for the year.

After-tax profit is projected at N6.1billion for the year, meaning that the first half of the year will account for about 74 percent of the profit figure at full year. This is in line with the company’s earnings pattern last year when 68 percent of the full-year profit of N6 billion was generated in the first half.

The full year outlook for the company is that profit would be flat after suffering a drop of over 15 percent in after-tax profit in 2019. Profit has been downward faced since 2018 though revenue has been stable over the past five years.

The company came under operating pressure in the second quarter with operating expenses jumping by almost 50 percent to over N18 billion quarter-on-quarter. That is about five times the increase of 10 percent in gross revenue over the same period. The operating cost exceeded the gross revenue of N17 billion for the quarter.

A jump of over 70 percent in claims related expenses led to the rise in operating expenses during the period, resulting in a negative net income of N1.2 billion in the second quarter.

The situation was however remedied by a windfall of over N6 billion from net fair value gains compared to N1.3 billion in the same quarter in 2019.

The gain enabled the company to absorb the loss in net income, meet management expenses of N1.7 billion for the quarter, and still left a pre-tax profit of N3.3 billion.

The year-on-year position for the company shows that the net value gain made the difference in the company’s finances at the end of half-year operations.

With a 46 percent plunge in net income to N3.6 billion at the end of June, the figure was just sufficient to cover management expenses of N3.3 billion. The half-year figure of net fair value gain at N5.2 billion provided much of the pre-tax profit of roughly N5.6 billion the company reported for the half-year.

The sharp drop in net operating income at half-year reflects the upsurge in operating expenses – which rose by 33 percent year-on-year to stand at N31.4 billion at the end of half-year operations.

The growth was driven mainly by an increase of 44 percent in claims related expenses and provisions to N17.4 billion at the half year.

An increase of over 25 percent in reinsurance expenses to N11.6 billion also contributed to the growth in operating expenses over the review period.

The company’s position at half-year is that operating expenses grew more than twice the increase of 15 percent in gross revenue.

Gross earnings amounted to N35 billion at the end of June 2020 but the proportion of it claimed by operating cost grew from 77.6 percent in the same period last year to nearly 90 percent at the half year. This accounted for the sharp drop in net income for the period.

The company’s revenue comes largely from premium income from life and non-life businesses as well as investment earnings. It is an investment holding company that operates two insurance companies and other subsidiaries in trusteeship/secretarial services and pension funds management.

Custodian and Allied Insurance Limited is the subsidiary that carries on general insurance business and Custodian Life Assurance Limited underwrites life insurance risks.

Other members of the group include Custodian Trustees Limited – which carries on the business of trusteeship and company secretarial services and CrusaderSterling Pensions Limited – which is engaged in the administration and management of pension fund assets.

The weak profit expectation for the second half reflects management’s anticipated drop in net fair value gains that provided the strength for the profit performance in the first half.

Management expects that net fair value gains would drop sharply from N5.2 billion at half a year to below N2.7 billion at full year.

Some strength is expected to come from a slight slowdown in operating expenses in the second half plus an accelerated increase in gross revenue. Management expenses are however expected to run upward in the second half when 57 percent of the projected full year figure is expected to be incurred.

The company closed half year operations with an after-tax profit of N4.5, which is an increase of under 11 percent year-on-year. The increase isn’t expected to be maintained to a full year with profit projected to close flat at N6.1 billion for 2020.

The company closed the 2019 operations with an after-tax profit of N6 billion.

Custodian Investment earned 75 kobo per share at the end of half-year trading, up from 67 kobo in the same period last year. It closed the 2019 operations with earnings per share of 97 kobo.

It paid a total cash dividend [interim and final] of 45 kobo per share for the 2019 financial year. It paid an interim cash dividend of 10 kobo per share to shareholders last September.

 

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