In its latest 9M’2020 earnings result published on Thursday 22nd October 2020, United Capital Plc (referred to here as the “the company”), one of Nigeria’s leading investment banking group grew its Gross Earnings and Net Income (i.e. PAT) by 33% and 26% respectively to ₦7.069 billion and ₦3.463 billion compared to the corresponding period of 2019.
Sharp Drop in Other Income Failed to Impact Gross Earnings
- Despite the 65% decline in its Other Income (to ₦308.82 million) relative to the corresponding period of 2019, the company’s Gross Earnings rose by 33% in 9M’2020 to print at ₦7.069 billion compared to ₦5.322 billion reported in 9M’2019.
- The increase in Gross Earnings was jointly driven by a 55% surge in Investment Income to ₦74.386 billion, a 62% increase in Fee & Commission Income to ₦2.249 billion, and a 61% spike in Net Interest Margin to ₦125.28 million relative to 9M’2019.
- We believe the surge in Investment Income could be attributed to the 74% increase (to ₦125.746 billion) in the size of total funds managed by the firm compared to 9M’2019, while the strong growth of both the Fee & Commission Income and the Net Trading Income could be largely attributed to improved performance of the Nigerian equity market post-COVID-19 lockdown period, which helped the business of the company.
Increases in Cost Heads Trims Profit Potential
- The company recorded increases on all its cost heads relative to 9M’2019, and this development trimmed part of the gains that eventually trickle down to the bottom line items.
- Noticeably, Personnel Expenses rose by 5% to ₦1.186 billion, Other OPEX Expenses increased by 34% to ₦1.325 billion, Depreciation & Amortization deductions increased by 73% to ₦159.55 million, while Impairment Allowance increased by 270% to settle at ₦273.68 million.
- We suspect that the increase in Other OPEX Expenses could be due to the unintended cost brought about by the emergence of the COVID-19 pandemic and the “pass-through” effect of the rising inflation rate in the broader economy since the beginning of the year.
- Likewise, we suspect that the sharp increase in impairment provision may not be unconnected with FX liquidity shortage that arose from COVID-19 disruption and the successive devaluation of the Naira/USD exchange rate in March (form ₦306/$1 to ₦360/$1) and July (from ₦360/$1 to ₦379/$1), 2020 to.
- Nevertheless, the company’s pre-Tax and Net-Income still grew by 26% compared to 9M’2019 to settle at ₦4.123 billion and ₦3.463 billion respectively.
- Expectedly, the measure of unit return to equity shareholders, the Earnings Per Share (EPS), of the company increased by 26% to print at 58k compared from 46k in the corresponding period of 2019.
Given the year-to-date (YDT) performance of the company and our projection for Q4’20, we maintained our recently reviewed target price of ₦3.70 for UCAP.