Premium valuations present Transcorp Power as good BUY

Since the listing of Transcorp Power Plc shares on the Nigerian Exchange Limited (NGX), many investment advisors in their initiation of coverage see the stock as one currently trading at a discount considering their valuations.

Defying high yields in the fixed income market which had triggered a rout, Nigeria’s equities market again commenced its journey northwards after Transcorp Power Plc listed by introduction its 7.5billion shares at N240 per share, which added over N1.8trillion to the equities market capitalisation.

In their Initiation of Coverage Report for Transcorp Power Plc, Esther Otusanya, analysts at Meristem said, “Our assessment of the firm’s financial performance reveals a resilient ascent marked by consistent revenue growth and strategic asset optimisation”.

“Looking ahead, we anticipate sustained revenue expansion for Transcorp Power, driven by existing capabilities and emerging opportunities. The company’s strategic initiatives, international market presence, and focus on operational efficiency position it for long-term success. We arrived at a fair value of N2.289trillion for Transcorp Power Plc by using a blend of various valuation models considering the company’s growth potential, risks, and overall market factors,” the analyst added.

Interestingly, in just three days of trading, Transcorp Power’s equities valuation has increased to N2.395 trillion from N1.8 trillion when it listed, representing an increase by about N595 billion. The company was listed under the utilities sector (sub-sector: Electric Power Generation).

In early trading on Wednesday, investors continued interest in Transcorp Power pushed its share price to N319.4, from preceding day’s N290.4, reaching a maximum 10percent daily rise.

The listing by introduction implies that existing shareholders in the Company are offering a portion of their ordinary shares in order to create liquidity in the market and enable institutional investors and members of the investing public to acquire shares in the Company.

CardinalStone Research analysts said Transcorp Power Plc is a good buy, noting that their target price for the stock is N323.64.

“We initiate coverage on Transcorp Power Plc (TPP) with a 12-month Target Price (TP) and projected market capitalisation of N323.64 and N2.4 trillion, respectively. Our Target Price implies a price return of 22.6percent and a BUY recommendation on the stock,” they said, adding that their outlook on the stock is premised among others on projected improvements in return metrics.

However, they identified risks to their expectations to include: the risk of Naira devaluation, risk of competition, risk of unfavourable changes in interest rates, and risk of higher trade receivables balances.

Transcorp Power Plc (TPP), a subsidiary of Transnational Corporation Plc is a player in Nigeria’s upstream power sector, boasting an installed capacity of 972MW.

Before the listing, the company’s shareholding structure was as follows: Transcorp Plc (51.6percent), Rich Point Limited (33.3percent), Woodrock Energy Resources Limited (7.4percent), and Others (7.7percent).

“We initiate coverage of Transcorp Power Plc (TPP) with a BUY recommendation and a target price of N288.36. Our valuation utilises the Discounted Cash Flow (DCF) methodology and reflects our belief in TPP’s immense growth potential, driven by several key factors including favourable market dynamics and possessing existing infrastructure to capitalise on opportunities within the market,” according to research analysts at Lagos-based Vetiva in their March 4 commentary titled, “Transcorp: On a trajectory for growth”.

“With a five-year period for projected free cash flows to firm (FCFF) and a sustainable long-term growth of 9percent, we estimate a discounted terminal value of N1.9 trillion in 2027, taking enterprise value to N2.2 trillion. After accounting for a net debt of N27 billion, we value Transcorp at a one-year target price of N288.36,” they noted.

According to Vetiva Research analysts, Transcorp Power Plc has demonstrated a consistent track record of impressive financial performance, exhibiting both revenue growth and profitability expansion over the past five years.

“This robust financial health positions the company for continued success and further investments. Revenue growth has been particularly impressive, with TPP achieving a double-digit Compound annual growth rate (CAGR) of 10percent over the past five years.

“This growth is primarily driven by strong demand for electricity and the company’s increased output. TPP has consistently improved its power generation capacity, leading to a higher volume of electricity sold and contributing to its topline expansion.

“Furthermore, TPP’s profitability has also shown positive trends. The company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) margin has steadily risen, reaching a commendable 51percent in the first 9 months of 2023,” they added.

Jude Chiemeka, acting CEO of NGX said that with Transcorp Power boasting a remarkable market capitalization of over N1 trillion, marking the first listing of the year, underscored the pivotal role NGX plays in shaping Nigeria’s economic landscape.

He added that NGX is not just a platform for trading stocks, “It is a catalyst for economic growth and development, and we recognise our responsibility in supporting the government’s privatisation efforts, particularly within the energy sector”.

“The listing of Transcorp Power exemplifies our belief that NGX serves as a viable platform for the privatization of energy companies, driving efficiency, innovation, and sectoral growth,” Chiemeka said.

The listing of Transcorp Power is further evidence of the execution of Transcorp Group’s integrated power strategy, ensuring Nigeria’s natural resources are harnessed for the development of the Nigerian economy and so delivering on the Group’s mission of “Improving Lives and Transforming Africa”.

Peter Ikenga, Transcorp Power’s Managing Director/CEO stated, “This is a testament to our unwavering dedication to powering Nigeria’s growth. We embark on this new chapter with a sense of purpose, innovation, and a commitment to continue to deliver sustainable energy solutions in Nigeria and beyond.”

The listing which comes on the 10th anniversary of Transcorp Power’s founding, demonstrates the Company’s strong corporate governance, operational excellence, and value creation for stakeholders.

This track record was earlier recognised in May 2023, when the Company became the first successor Power Generating Company in Nigeria to receive its post-privatization discharge from the National Council on Privatisation, having met and surpassed the key performance indicators set out by the Bureau of Public Enterprises (BPE).

Transcorp Power operates the Ughelli Power Plant in Delta State, with an installed capacity of 972MW. At the time of acquisition, the plant had an available capacity of 160MW. Transcorp Power invested and increased the available capacity to 680.83MW (a 227percent increase) within 4 years of acquisition, surpassing the 5-year target of 670MW set by the Bureau of Public Enterprises.

Transcorp Power Plc is a member of the West African Power Pool and a participant in the ECOWAS Regional Electricity Market. Today, Transcorp Power supplies electricity to the ECOWAS Regional Market.

During the Facts Behind the Listing presentation, Evans Okpogoro, Chief Finance Officer of Transcorp Power noted that the Company’s revenue has grown impressively over the past five years, driven by a surge in energy delivery and capacity charge, coupled with the lucrative expansion into international markets.

Okpogoro explained that the Company has sustained and grown its EBITDA margins, thereby strengthening its pedigree as one of the leading power generation companies in Nigeria.