Transcorp Power has highest Return on Equity among global peers

Transcorp Power, a power generating company, has emerged with the highest Return on Equity (ROE) among its international counterparts.

Data gathered from Cardinal Stone, an independent, multi-asset investment management firm showed Transcorp Power is more efficient in the use of equity in the production process than peer rivals as its return on equity (ROE) of 64.10 percent as of December 2023 towers over, Geregu Power of 34.1 percent, Gulf Energy Development Public Company (Gulf Energy) 14.30 percent, and India Power Corporation Limited (India Corp) 1.30 percent.

Return on equity (ROE) is the measure of a company’s net income divided by its shareholders’ equity.

Despite the impact of naira depreciation on gas prices on energy cost and the hit of the devaluation bloated on gas payment in Naira terms, Transcorp Power generated earnings before interest depreciation, and amortisation (EBITDA) of margins of 48 percent that is higher than Gulf Energy, 20.10 percent, and Indian Power, 4.30 percent.

The company’s gross margin stood at 51.30 percent as at December 2023, and that compares with Gulf Energy, 19.30 percent, and Indian Power, 21.10 percent.

Transcorp Power recorded a Net income margin of 35.90 percent, and which compares to Gulf Energy, 13.0 percent, and India Power 2.50 percent.

The company currently accounts for 7.0 percent of Nigeria’s installed grid capacity but generates 10.0 percent of the country’s power needs, with its leadership position in the West African Power Pool (WAPP) and planned strategic alliances with DISCOs, eligible customers, and state governments leaving legroom for output growth in the near term.

“We initiate coverage on Transcorp Power Plc with a 12-month target price and projected market capitalisation of N323.64 and N2.4 trillion, respectively. Our target price implies a price return of 22.6% and a BUY recommendation on the stock”, CardinalStone said in a market update.

The investment firm said its outlook on the stock is premised on projected improvements in return metrics and is consistent with the company currently accounts for 7.0 percent of Nigeria’s installed grid capacity but generates 10.0 percent of the country’s power needs.

Analysts rate the company positive having noted that Transcorp Power’s leadership position in the West African Power Pool (WAPP) and planned strategic alliances with DisCos, eligible customers, and state governments leaving legroom for output growth in the near term.

“The material export component of revenue is likely to continue providing some important hedge against the negative impact of Naira devaluation on costs linked to energy and equipment maintenance.

“The company’s average dividend payout ratio of about 75.0% over the last five years is materially higher than the mean of 48.0% for EMEA peers ex GEREGU over the same period.

“Our expectations for operating cash flow and dividend paid cumulative annual growth rate of 17.4% and 26.1%, respectively, between 2024 and 2028, are likely to keep investors mostly interested in the stock in the near to medium term.

“Our projection for a relatively low mean financial leverage of 328.6% over our forecast horizon (vs 487.3% in the last five years) and robust cash position make the ticker suitable for investors looking to outperform in a macroeconomic environment characterised by hawkish monetary policy and rising interest rates.

“The government’s plan to clear legacy debt owed to power sector players bodes well for receivables management and the overall cash flow position of the company. The company’s involvement in the black starting of the entire grid upon collapses may have conferred a level of systemic importance that may be critical to its outlook”, CardinalStone said in its market update.