United Capital Plc: Sustaining The Earnings Leap

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United Capital Plc finished the third quarter operations with reasonable indications that it could sustain the earnings leap seen in the previous interims to a full year.

Revenue performance has been reinforced with strong growth in investment income – its main income line.

The investment banking firm looks promising to change its earnings story from the lowest revenue figure in four years in 2019 to a new peak in gross earnings in 2020.

The company broke free from three years of operating pressure early this year and has since then held forth the upturn in revenue and profit.

Profit was up by 26 percent at the end of the third quarter, a rebound from a drop in pre-tax profit to a four-year low at the end of 2019.

Some cost increases encroached on earnings however and scratched profit margin at the end of the third quarter.

The question mark on the company at the end of the first quarter was whether it could sustain the earnings leap seen in the quarter, as its main revenue line was still dropping.

The third-quarter performance indices give a positive affirmation with a rebound in investment income while maintaining impressive growth in most of the other income lines.

We held the view that the strong growth in the first quarter raises hopes for an improved earnings story for the company this year subject however to the impact of the economic lockdown on operations.

The hopes are being realised in what is unfolding to be the best year for the company since 2015.

The company’s management continued to limit the increase in operating costs against the upturn in revenue.

This is keeping costs generally under check – which has enabled the retention of an impressive profit margin.

United Capital converted 49 kobo of the naira of revenue into net profit at the end of the third quarter.

The company closed the third quarter operations in September 2020 with gross earnings of over N7 billion, which is a year-on-year improvement of 33 percent. This is a rebound from a drop of 7 percent in gross income at the end of 2019.

Based on the current growth rate, the company may close the 2020 financial year with gross earnings approaching N10 billion.

There has not been a reasonable improvement in revenue since 2017. Gross earnings went down by 7 percent to N8.6 billion in 2019 – the lowest revenue figure for the company since 2016.

Investment income – the company’s main income line, rebounded by 55 percent to N4.4 billion at the end of the third quarter from a 3 percent decline at the end of 2019 and a 16 percent drop in the first quarter.

The company’s investment portfolio dropped by over 28 percent to N65 billion at the end of the third quarter from the closing figure last year.

Fee and commission income also grew by about 62 percent to over N2.2 billion over the same period. Net trading income rose by more than 60 percent to N125 million. Other income however went down by 65 percent to N309 million at the end of September 2020.

The third quarter operations ended with an after-tax profit of about N3.5 billion for United Capital, which is a year-on-year increase of 26 percent.

This is however a slowdown from the preceding quarters as two cost elements claimed increased proportions of revenue in the third quarter.

These are depreciation and amortization, which grew by 73 percent over the period, and a shift in impairment allowance from a net write-back of 161 million to a net charge of N274 million.

Total operating costs grew well ahead of gross earnings at over 43 percent compared to 33 percent.

That scratched net profit margin– which slipped from 51.5 percent to 49 percent over the review period. The company remains one of the tops on profit margin among Nigeria’s listed companies.

Last year, the company applied a tax credit to change a drop of over 20 percent in pre-tax profit into an increase of 14.5 percent in after-tax profit.

It has maintained a new strength in profit performance so far at the end of the third quarter with elevated revenue and improving profit.

Growing revenue with a big profit margin is the strength of United Capital for the current financial year. If the high points are maintained in the final quarter, management can hope for the best earnings story in several years at the end of 2020.

The company closed the third quarter with earnings per share of 58 kobo, improving from 46 kobo per share in the same period in 2019.

Last year ended with earnings per share of 83 kobo and the company gave out 50 kobo per share to shareholders in cash dividend.

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