R.T. Briscoe Nigeria. FSDH Equity Research Report. June 10, 2009 Plc- Driving the Middle Class. Equity Research Report: R.T Briscoe Plc -NIGERIA

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1 R.T. Briscoe Nigeria June 10, 2009 Plc- Driving the Middle Class This publication is produced by FSDH Securities Limited (FSDH Sec) a subsidiary of First Securities Discount House Limited (FSDH) solely for the information of users who are expected to make their own investment decisions without undue reliance on any information or opinions contained herein. The opinions contained in the report should not be interpreted as an offer to sell, or a solicitation of any offer to buy any investment. FSDH Sec may invest substantially in securities of companies using information contained herein and may also perform or seek to perform investment services for companies mentioned herein. Whilst every care has been taken in preparing this document, no responsibility or liability is accepted by any member of FSDH for actions taken as a result of Information provided in this publication. FSDH Equity Research Report FSDH Research Page 1

2 1.0 Executive Summary 1.1 History: R.T. Briscoe Nigeria Plc (Briscoe) was incorporated in Nigeria on March 09, 1957, as a private limited liability company and became a wholly owned subsidiary of the East Asiatic Company Ltd. of Copenhagen, Denmark in The company became a public liability company in 1973 and the shares were quoted on the Nigerian Stock Exchange (NSE) in Briscoe has been a dealer of Toyota vehicles in Nigeria since 1957 under the trade name Briscoe Motors. In 2005, Briscoe expanded its product portfolio and was appointed a dealer of the Ford Motor Company for the marketing, sales and service of the Ford range of vehicles. The Ford dealership is conducted under the trade name Briscoe- Ford. Briscoe s subsidiary, ATLAS COPCO, markets and service material handling equipment, industrial compressors, mining and drilling equipment as well as generating sets. Briscoe, in partnership with Asset Resource Managers (ARM), set up a property management company, Briscoe Properties Limited (BPL) to service a residential estate (currently under construction) and other available properties. The non-motor activities however account for less than 10% of Briscoe s activities. 1.2 Business: Briscoe is principally engaged in the sales and service of Toyota and Ford motor vehicles and technical equipment, including compressors, mining and drilling equipment and generating sets. The company also has an infrastructure services division, Briscoe Solution Plus (BSP); it is spearheading the company s drive into new markets and technology. With a clear focus and a long term commitment, Briscoe Solution Plus (BSP) mission is to be the market leader in these new areas: Telecommunications, as well as wireless infrastructure planning, provision and management in Nigeria. BSP offers a portfolio of coverage sites across the country together with a range of turnkey capabilities that includes equipment supply, site construction and maintenance. Table 1: Results At a Glance December, 2008 Particulars Amount % Turnover (N mn) 20, Profit Before Taxation (N mn) Taxation (N mn) Profit After Taxation (N mn) Share Capital (N mn) Shareholders Fund (N mn) 3, Per 50k Share Data (based on mn Ordinary Shares of 50k each) Earnings Per Share (N) 1.11 (17.63) Net Assets Per Share (N) 5.67 (8.61) Dividend Declared (N) 0.40 (0.20) Dividend Cover (times) Stock Exchange Quotation at Year End (N) (42.81) Number of Employees 169 (3.43 Price as at June 10, 2009 N7.94 Fair Value N17.93 Recommendation BUY Table 2: Professional Parties Party Meristem Registrars Akintola Williams Deloitte Table 3: Directors Name Position Holding Mr. C.A. Olowokande Chairman 390,625 Mr. D. Olatunji MD/CEO 339,648 Mr. B.O. Onajide Director 312,500 Mr. R.O. Eso Director 5,828,036 Mr. A. Alli* Director 158,770,907** Alhaji S. Ado Bayero Director Nil Mrs. A.A. Sagoe Director 37,500,000* Table 4: Company Summary Ticker RTBRISCOE Sector Automobile & Tyre Date of Incorporation March 9, 1957 Date of Listing March 15, 1974 Role Registrar Auditors Financial Year End December Number of Fully Paid Share 680,812,926 Current Capitalization (N) 5,405,654,632 NSE Capitalization (N) 6,514,676,842, % of NSE Capitalisation Week high (N) Week low (N) 5.25 YTD Return (%) (54.00) 52 Weeks Volume Traded 272,649 Trailing EPS (N) 0.93 Trailing P/E ratio (X) 8.57 * Retired with effect from April 04, 2008 ** Indirect Holding Sources of Information: Annual Report & Accounts, Company s website, CBN, NBS, NSE, and FSDH Research. 2.0 Review of Nigerian Economy According to the Central Bank of Nigeria (CBN), Nigeria s Gross Domestic Product (GDP) grew in 2008 by 6.41% as against the growth rate of 6.45% in Even though the performance of the economy in 2008 was good in the light of the global economic recession, it fell below the Federal Government s target of 9.8% for the year. The growth in the economy was driven largely by non-oil sector, while the crisis in the Niger FSDH Research Page 2

3 Delta area and the current global economic & financial crisis limited the contribution of the oil sector to the GDP. According to the National Bureau of Statistics (NBS), the structure of the Nigeria s economy as at December 2008 (provisional) in term of sectoral contribution to the GDP are: Agriculture: 42.07%; Manufacturing: 4.13%, Solid Minerals: 0.31%; Telecomm/Postal Services: 2.90%, Finance & Insurance: 3.79%; Building & Construction:1.83%; Hotel and Restaurants:0.46%; Crude Petroleum & Natural Gas:17.54%; Wholesale and Retail Trade:17.33% and Others: 9.63%. Composition of Shareholders Fund (2008) 3.66% 93.92% 0.36% 2.06% Currently, more than 95% of the country s foreign exchange earnings and about 85% of its revenue is derived from crude oil. In addition, the economy has a very high propensity for imported goods. The recent sharp drop in the price of oil in the international market as a result of weak demand from the industrialized nations and the weak non-oil exports in Nigeria as a result of infrastructure deficiency, are responsible for the recent depreciation and subsequent devaluation of the value of the country s currency. Some factors which have limited the growth of the economy includes poor trasportation system, epileptic power supply, poor comminucation system, regulatory and institutional environment that are not cost effective for running businesses in Nigeria and low access to long term finance. The current administration is implementing a number of policies to diversify the productive base of the economy so that the economy is less vulnerable to the international oil price volatility. The government is addressing this through the implementation of its 7- point agenda. In addition, it is embarking on a number of reform agenda to stimulate economic growth, and strengthening public expenditure management. Share Capital Revaluation Reserve Share Premium Retained Earnings 3.1 Strengths & Opportunities Improved after sales services from its ultra modern show room and service centre Diversified product range Experienced and dedicated management team Strong working capital Emergence of and growing middle class in Nigeria Growing Auto acquisition financing schemes in Nigeria Positive government policies in buying new cars 3.2 Weaknesses & Threats Depreciation and Devaluation in the value of Naira Rising cost of imports Presence of other cheaper alternatives in the Nigerian market. 4.0 Analysis & Recommendation 4.1 Capital Structure Total shareholders fund of Briscoe grew from N2.82bn in 2007 to N3.23bn in 2008, translating to an increase of 14.48% between the periods. The increase in total shareholders fund was primarily driven by 22.53% growth in general reserve from N1.81bn in 2007 to N2.22bn in The Compound Annual Growth Rate (CAGR) in the total shareholders fund between 2004 and 2008 is 15.94%. The long term assets (fixed assets and investments) of Briscoe stood at N952.96mn in 2008 from N794.62mn in 2007, representing a growth of 19.93%. The CAGR between 2004 and 2008 stood at 30.26%. The Long term assets consist of N168mn worth of investments in Fara Park Limited (equity note) and Briscoe Property Ltd. The equity note in Fara Park Ltd guaranteed 18% par annum return. The current assets which grew by 32.50% to N8.74bn in 2008 from N6.59bn in 2007 was boosted by the growth in cash & bank balances increased by % to N997.58mn, while trade debtors increased by 48.91% to N2.72bn. Adding the long term assets and the current assets of the company together, the total assets grew by 31.15% to N9.69bn in 2008 from N7.39bn in This represents a CAGR of 36.60% between 2004 and The total assets of the company were financed by a mix of equity and short term borrowing. As at December 2008, the total Assets of Briscoe stood at N9.69bn while total liabilities stood at N6.47bn. The short term liabilities stood at N6.21bn accounting for 96% of the total liabilities while the long-term liabilities stood at N257.24mn, accounting for 4% of the total liabilities. As at December 2008, Briscoe had N3.67bn bank overdraft and commercial paper in its books. The company provided negative pledge FSDH Research Page 3

4 over its assets in respect of the borrowing. Its short term borrowing accounted for 38% of the total assets. Also in the same year, it paid about N533.12mn out as interest expenses. This amount is hitting deep into the bottom line of the company. We recommend a restructuring of the short term loan to a medium and long term loan in order to reduce pressure on the earnings attributable to the Ordinary Shareholders. In addition, the company should consider taking advantage of the auto financing schemes offered by the Nigerian banks. Working capital stood at N2.52bn at the end of the year, an improvement from N2.27bn as at the end of the previous year. We note that between 2004 and 2008 the company operated on a positive working capital and recorded a CAGR of 12.84%. In addition, the current ratio and the quick ratio as at 2008 stood at 1.41x and 0.79x respectively, a decrease from 1.52x and 0.83x, respectively. It should however develop cash collection strategies to reduce the build up of debtors % to N3.84bn) and foreign currencies purchased for imports (up 6.22% to N175.94mn). The company needs to develop strategy to reduce the trade debtors which has increased substantially. In another development, the current liabilities increased from N896mn in 2004 to N6.21bn in 2008, representing a CAGR of 62.29% between the period and an increase of 43.61% between 2007 and The relationship between the current assets and current liabilities reflects an improvement; however, there was a marginal decrease in the current ratio and quick ratio between 2007 and This is because the current liabilities recorded a more than proportionate growth than current assets during the periods. The current ratio decreased to 1.41x in 2008 from 1.52x. In a similar development, the quick ratio decreased to 0.79x in 2008 from 0.83x in The cash used in investing activities decreased by 63.87% from N312mn in 2007 to N113mn in 2008, while the net cash from financing activities increased by 38.32% from N531.93mn in 2007 to N735.78mn in The net cash generated from operating activities increased by % from a negative N634.61mn in 2007 to N420.62mn in 2008.The cash and cash equivalent as at December 31, 2008 stood at a negative N2.67bn and is financed by short term borrowing in the money market. 4.3 Profitability Briscoe recorded impressive growth in its top line during the last 5 years as turnover increased from N5.58bn in 2004 to N20.05bn in 2008, representing a CAGR of 37.67% and increased by 23.47% between 2007 and An analysis of the turnover by products indicates that the revenue from motors accounted for 95.84% of the total, while atlas copco accounted for 4.16%. Meanwhile, the capital employed (i.e total assets less current liabilities) increased from N1.89bn in 2004 to N3.48bn in 2008, representing a CAGR of 16.50% and a growth of 13.54% between 2007 and Looking at the historical performance of Briscoe, we note that it has consistently deployed its assets to generate revenue to reward the equity holders. In other words, the risk of generating inadequate cash flow to meet interest expenses is minimized. As at 2008, the interest cover which represents the number of time the earnings of a company can cover its interest obligations deteriorated to 2.76x from 3.50x in However, the ratio remained above 2x throughout the last five years covering 2004 and Liquidity The current assets of the company increased from N2.45bn in 2004 to N8.74bn in 2008 representing a CAGR of 37.39% and a growth of 32.50% between 2007 and The major contributors to the increase between the immediate two years are: cash & bank balances (up % to N997.58mn), trade debtors (up by 48.91% to N2.72bn), stocks (up On the other hands, the growth in the bottom-line slowed down as a result of the huge interest expenses as noted earlier. This resulted in a 4.46% growth in the profit before tax from N899.31mn in 2007 to N939.44mn in The return on equity stood at 19.47% in 2008, down from 21.65% in Similarly, the return on assets stood at 15.20%, a decrease from FSDH Research Page 4

5 17.05% recorded in However, return on capital employed increased marginally from 41.14% in 2007 to 42.36% in Briscoe s Gross Profit (GP) margin decreased to 11.84% in 2008 from 13.13% in This reflects that management should work on improving on its cost management strategy. Also, Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) margin and PBT margin decreased to 7.78% and 4.69% in 2008 from 8.31% and 5.54% in 2007 respectively. The contribution of staff to the company s profitability between 2007 and 2008 increased marginally as PBT per staff increased to N3.72mn in 2008 from N3.49mn in 2007, while staff cost per staff decreased marginally from N1.91mn in 2007 to N1.73mn in Management Efficiency The number of time capital employed could generate revenue declined from 18.85x in 2007 to 17.34x in Briscoe needs to put in strategy to reduce the collection period which increased from days in 2007 to days in The company s collection period is not impressive compared with the payment period as at December 2008 which stood at days. This suggests that the company needs to improve on its working capital management in order to improve its efficiency and deliver better shareholders value. 4.5 Q1 March, 2009 Unaudited Result The unaudited Q1, 2009 result of R.T.Briscoe (Nigeria) Plc (Briscoe) for the period ended 31 March, 2009 showed that its Turnover (TO) increased marginally by 4.5% to N4.6bn, compared with N4.4bn in the corresponding period of Profit Before Tax (PBT) increased marginally by 1.5% between 2008 and 2009 to N271.7mn from N267.6mn in the corresponding period of The tax provision which increased by 1.5% between 2008 and 2009 to N86.9mn from N85.6mn in 2008 brought about a Profit After Tax (PAT) of N184.8mn as against N181.9mn in 2008, representing a marginal increase of 1.6%. Looking at the company s profit margins, the costs associated with a unit sale increased marginally between Q1, 2008 and Q1, 2009, and decreased over the position as at the end of the financial year in The PBT margin decreased marginally to 5.91% in Q1, 2009 from 6.08% as at Q1, 2008, but up from 4.69% as at the end of the financial year in December, This shows that the company s total costs as a percentage of TO stood at 94.09% in Q1, 2009, up marginally from 93.92% in the corresponding period of PAT Margin currently stands at 4.02%, down marginally from 4.13% in the corresponding period of 2008, but up from 3.13% as at FY The result also indicates that the percentage of the TO, PBT, and PAT in the Q1 09 to the Full Year Audited TO, PBT and PAT for the period ended December, 2008 are: 22.94%, 28.92% and 29.43%, respectively. Given the current run rate the company may likely surpass its previous year s performance in the bottom line but needs to work harder to meet and surpass the top-line. 4.6 Investment Analysis An Investment in Briscoe shares in the last five year has proved to be a worth while investment in terms of capital appreciation and growth in benefits (cash dividend and bonus payment). The Earnings Per Share (EPS) grew from N0.43 in 2004 to N1.11 in 2008 representing a CAGR of 26.81%, but there was a negative growth of 17.63% between 2007 and In a similar development, Dividend Per Share (DPS) increased from N0.25 in 2004 to N0.40 in 2008 representing a CAGR of 12.47% and a decline of 20% between 2007 and The net assets per share (NAPS) also increased from N4.92 in 2004 to N5.67 in 2008 representing a CAGR of 3.65% and a decline of 8.61% between 2007 and FSDH Research Page 5

6 of 10.04%. Applying the foregoing parameters on the Capital Asset Pricing Model (CAPM), the cost of capital (our discount rate) generates 16.74%. 4.7 Historical Return Analysis An analysis of the historical return on the investment in the Ordinary Shares of Briscoe between 2004 and the date of this report was impressive. The total return during the period was made up of Capital Appreciation, Bonus, and Dividend that the investors enjoyed on their investments. Our illustration using N100,000 initial investment in January 2004 grew to N390, as a result of capital appreciation, dividend and bonus earned. This resulted in a profit of N290, and a CAGR of 31.32%. The number of shares the initial investment bought, net of transaction costs, was 18,250units. The total dividend earned during the period is N50,918, while the bonus earned during the period was 24,523units.The share price appreciated by 50.95% from N5.26 in 2003 to N7.94 as at the time of this report. We used mn Ordinary Shares taking into consideration the shares that will arise from the bonus of 1 for 5 declared in the financial year ended December We adjusted for the N3.67bn short-term debt in the book of the company as at FY 08.The Discounted FCF Model generates N24.29 per share while the Discounted Future Earnings Model generates N11.58 per share. A simple average of the two models generates N17.93, which is our fair value. The wide disparity between the two valuation methods is as a result of the huge interest that the company is paying due to the large short term loan in the book of the company. The forward earnings yield based on our fair value generate 5.50%. Meanwhile, our forecast DPS for the forecast period are 0.36k, 0.39k, 0.44k, 0.51k and 0.59k, respectively. We therefore place a BUY on R.T. Briscoe Stock at the current market price of N7.21. Despite the upside potentials in the current price of R.T. Briscoe at N7.94 offers to the fair value of N17.93 per share, the trading pattern of the stock on the Nigerian Stock Exchange(NSE) shows that it is not a very liquid stock. Often times investors who are willing to sell huge quantities hardly find willing buyers. 4.8 Valuation In arriving at a fair value for R.T. Briscoe we considered the current economic meltdown and the impact of it on the business of the company. We estimated Turnover, Free Cash Flow (FCF) and PAT for the period between December 2009 and We project a Turnover of N21.46bn, N23.78bn, N26.77bn, N30.79bn, and N35.40bn, FCF of N1.32bn, N1.54bn, N2.2bn, N2.54bn and N2.94bn and PAT of N0.67bn, N0.73bn, N0.84bn, N0.96bn and N1.01bn for 2009, 2010, 2011, 2012 and 2013 respectively and applied a terminal growth rate of 6.32%. We used a beta value of 0.62x based on the 5-year historical returns on the company share price and the Nigerian Stock Exchange All Share Index (NSE ASI). We used the coupon rate of 10.50% on the 5-year Federal Government of Nigeria (FGN) Bond as our risk free rate and a risk premium FSDH Research Page 6

7 Table 5: Profit & Loss Account( ), N mn Change (%) CAGR(%) Turnover 20,051 16, ,162 7,726 5, Cost of Sales 17,678 14, ,416 6,829 4, Gross Profit 2,373 2, , Operating Profit 1,473 1, EBITDA 1,560 1, , PBT Tax PAT Balance Sheet ( ), N mn Change(%) CAGR (%) Fixed Assets Current Assets 8,738 6, ,233 2,811 2, Total Assets 9,691 7, ,777 3,349 2, Current Liabilities 6,215 4, ,437 1, Long Term Liabilities Total Liabilities 6,472 4, ,569 1, Working Capital 2,523 2, ,796 1,444 1, Total Equity 3,226 2, ,390 1,858 1, Key Financial Ratio( ), % Gross Profit Margin EBITDA margin PBT margin ROE ROCE Collection Days Payment Days Current Ratio Debt Ratio Interest Cover(x) Equity/Assets EPS DPS Net Asset Per Share FSDH Research Page 7

8 Table 6: FSDH Research Earnings Forecast for R.T. Briscoe ( ) Turnover(N mn) 21,455 23,279 26,770 30,786 35,404 EBIT(N mn) 1,576 1,710 1,966 2,261 2,600 EBITDA(N mn) 1,663 1,796 2,051 2,345 2,685 PBT(N mn) 988 1,072 1,232 1,417 1,630 Tax(N mn) PAT(N mn) ,108 Dividend Payment(N mn) EBIT Margin (%) EBITDA Margin (%) PBT Margin (%) PAT Margin (%) EPS(N) DPS(N) Earnings Yield (%) Dividend Yield (%) P/E Ratio(x) Number of Shares(mn) Dividend Payout(%) Table 7: Annual Capital Growth & Returns Analysis of N100,000 Investment in Nestle Nigeria Plc since January 02, 2004 Value Receipt Period Amt Invested 100,000 Holding As At January 18,250 22,813 22,813 22,813 28,516 36,645 Amt. used less cost 96,000 Bonus Shares Received 4, ,703 7,129 7,129 24,523 Share Price Jan Cumulated Holding 22,813 22,813 22,813 28,516 35,645 42,773 No of Units Purchased 18,250 Dividend Earned 5,749 5,133 7,186 7,186 12,832 12,832 50,918 Date of Valuation June 10, 09 Accumulated Shareholding 42, Increase in Shareholding(%) Price (N) 7.94 Market Value (N) 339, Total Dividend (N) 50, Value of Investment (N) 390, Cost of Investment (N) 100,000 Profit (N) 290, % Increase CAGR FSDH Research Page 8

9 Contact: For Enquiries, Please Contact Us at Our Offices: Lagos Office: UAC House (6 th -8 th Floors) 1/5 Odunlami Street, P.M.B Lagos. (Tel.) (Fax) Port Harcourt Office: Afribank Bank Building (2nd floor, 5 Trans Amadi Road, Port Harcourt.(Tel) (Fax) Abuja Office: Orji Uzor Kalu Plaza, Plot 979, 1 st Avenue, Off Ahmadu Bello Way, Cadastral Zone AO, Central Business District, Abuja. (Tel) (Website): www: fsdhsecurities.com fsdhsecurities@fsdhgroup.com Disclaimer Policy This publication is produced by FSDH Securities (FSDH Sec) a subsidiary of First Securities Discount House Limited (FSDH) solely for the information of users who are expected to make their own investment decisions without undue reliance on any information or opinions contained herein. The opinions contained in the report should not be interpreted as an offer to sell, or a solicitation of any offer to buy any investment. FSDH Sec may invest substantially in securities of companies using information contained herein and may also perform or seek to perform investment services for companies mentioned herein. Whilst every care has been taken in preparing this document, no responsibility or liability is accepted by any member of FSDH or FSDH Sec. for actions taken as a result of information provided in this publication. FSDH Research Page 9