CENTRAL SECURITIES CLEARING SYSTEM PLC NASD EQUITY NIGERIA FINANCIAL SERVICES CSCS: from West Africa to the rest of the world INVESTMENT HIGHLIGHT HALF YEAR 2015: Growing Revenue and Bottom-Line Amidst Market Turmoil Central Securities Clearing System (or the Company or CSCS ) Plc, released its unaudited Financial Statement for the period ended June 30, 2015 on the 16th of July 2015. Total revenue grew by 3.65% to 3.94 billion ($19.79mn) from 3.80 billion ($19.09mn) Year-on-Year (YoY) while profit after tax (PAT) grew by 5.68% to 2.35 billion ($11.81mn) from 2.23 million ($11.20mn) YoY. The Company reported a slight increase in total expenses of 0.83% leading to a decline in profit before tax of 0.57%. CSCS had a stronger second quarter performance as total revenue and profit after tax grew by 10.42% and 0.29% respectively quarter on quarter (QoQ). This is attributable to the Company s commitment to deliver on services driven by innovative technology and intention to support diversification, scale and growth. In the full year report of the Company (FY 2014), net operating income grew by 19.66% while profit after tax grew by 23.64%. Earnings per Share increased by 23.64% to 92.44 kobo as against 74.77 kobo of FY 2013. The Company declared an improved dividend of 27 kobo per share; a 22.73% increase from previous year s 22 kobo per share. We have made a two year forecast (2015 and 2016) which reflects moderate growth in 2015 due to turmoil in the capital market. GTI Securities Research Coverage Analyst: Korede Ologun o.ologun@gti.com.ng Lead Analyst: Chuks Anyanwu c.anyanwu@gti.com.ng 21 August 2015 CSCS PLC NASD OTC Symbol: SDCSCSPLC Listed on the NASD OTC Recommendation: BUY Key Statistics Fair Value N7.19 Current Price N6.00 Outlook Industry View Market Cap Exchange Rate [$] Price-Earnings [P E] Neutral Positive $301.51Mn N199 2014 Trailing 6.27X 2015F 5.88X 2016F 6.71X ROE 22.46% ROA 20.03 % Outstanding Shares 10Bn 1
VALUATION ANALYSIS Based on our analysis, CSCS Plc is currently undervalued. It is trading at a discount to our estimated fair value of N7.19 with a 12Month investment horizon. In arriving at our fair value for the stock, we focused on the historical financial performance of the stock and our expectation for FY 2015. Our fair value for CSCS shares was calculated using the Dividend Discount Model (DDM) comprising our expected dividend consideration for the Company and GTI Securities customized tweak to adjust for the risk of investing in the Nigerian health sector. Our Required Rate of Return (RROR) factors in a risk premium of 12% and the yield for the most recently issued 20-Year FGN Bond was applied as the risk free rate of return. Revenue and earnings have continued to grow over the last five years with a projection of sustained growth. We have placed a BUY rating on the stock of CSCS Plc. FORECASTS Our FY 2015 revenue forecast for CSCS is N9.58 billion ($48.14mn) representing a 20.00% growth relative to FY 2014, while our profit after tax estimate for FY 2015 is N5.52 billion ($27.73mn); a 19.58% increase from FY 2014. This yields an improved EPS of N1.10 and a forward P/E of 5.88X which signifies inherent growth potentials in the Company. Financial indicators have been stable over the years with a slight growth in ROA. The Company has continued to broaden its operations with the assignment of symbols for 33 new securities in the equities and OTC market to facilitate listing and trading on the floor of the Exchanges. The Company is continually improving its technology to provide liquidity-savings mechanism to offer fast, final payments while maximizing liquidity efficiency for participants. Since the clearing house helps to keep all positions in one place leading to an investor s portfolio being eligible for margin offsets, we expect CSCS to expand its operations towards derivatives; interest-rate swap and other financial instruments. Earnings Per Share (EPS) has increased over the last five years with exception for 2011. 2
INVESTMENT CONCLUSION/OUTLOOK FOR CENTRAL SECURITIES CLEARING SYSTEM PLC The shares of CSCS Plc currently trade at 19.83% discount to our fair value estimate of N7.19. CSCS, an agent for Central Depository, Clearing and Settlement of transactions in the Nigerian Capital Market; operates a computerized depository, clearing, settlement and delivery system for transactions in securities in the Nigerian Capital Market. Although the percentage of total income of investment income declined between FY 2014 and FY 2013, transaction/depository fees increased as a percentage of total income signifying improvements in the business. Our analysis clearly shows the growth potentials inherent in CSCS owing to several ongoing projects such as its active involvement in the West African Capital Market Integration (WACMI), appointment as a Pre-Local Operating Unit (LOU) through the Nigerian SEC for issuance of Legal Entity Identifier (LEI). We have forecasted a sustained growth in 2015 and expect a growth in EPS by 19.58% due to a projected 20% growth in profit after tax at 2015 year end. Our analysis has factored in the activities in the economy ranging from unstable exchange rate, rising inflation figures and new CBN monetary policies. The Company paid a final dividend of N0.27 (a growth of 23.64% from previous dividend) for FY 2014. We have a BUY recommendation on the shares of CSCS Plc because it is lower than our fair value price. 3
NIGERIAN BREWERIES 2011 2012 2013 2014F 2015F N '000 N'000 N'000 N'000 N'000 REVENUE 230,123,215 252,674,213 268,613,518 266,129,091 280,766,191 GROSS PROFIT 109,762,016 125,452,144 136,477,042 138,387,127 151,613,743 GROSS PROFIT MARGIN 48% 50% 51% 52% 54% PROFIT B/F TAX 56,372,692 55,624,366 62,240,317 59,016,267 67,383,886 PBT MARGIN 24% 22% 23% 22% 24% TAX 18,347,122 17,581,652 19,159,968 17,234,000 21,562,843 PROFIT AFTER TAX 38,025,570 38,042,714 43,080,349 41,782,267 45,821,042 OWNER'S EQUITY 78,050,571 93,447,892 112,359,185 128,089,471 151,145,576 CASH DIVIDEND 125k 300K 450K 450K 460K RELEASE DATE 22/02/12 22/02/13 13/02/14 AGM DATE 16/05/12 15/05/13 14/05/14 CLOSURE DATE 14/03/12 14/03/13 05/03/14 PAYMENT DATE 17/05/12 16/05/13 15/05/14 Source: CSCS FINANCIAL SUMMARY AND FORECAST, 2015 AND 2016 2011 2012 2013 2014 2015F 2016F N'000 Revenue 4,193,971 5,172,244 6,887,603 8,241,938 9,587,728 11,310,424 Profit Before Tax 1,730,377 3,094,174 4,824,283 5,759,951 6,733,443 7,913,825 Profit After Tax 1,000,900 2,577,847 3,738,297 4,622,045 5,527,263 6,707,644 Share Capital 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 Earnings Per Share** 20.02 51.56 74.77 92.44 110.55 134.15 Dividend Per Share** 10.00 15.00 22.00 27.00 32.00 39.00 **in kobo value 4
DISCLOSURE Conflict of Interest GTI Securities Ltd and its sister companies within the GTI Group may execute transactions in securities of companies mentioned in this document and may also perform or seek to perform investment banking services for those companies mentioned herein. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and report(s). Analyst Certification Where applicable, the views expressed in this report accurately reflect the analysts' views about any and all of the investments or issuers to which the report relates, and no part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations, views or corporate finance transactions expressed in the report. Disclaimer This report by GTI Securities Ltd is for information purposes only. While opinions and estimates therein have been carefully prepared, the company and its employees do not guaranty the complete accuracy of the information contained herewith as information was also gathered from various sources believed to be reliable and accurate at the time of this report. We do not take responsibility therefore for any loss arising from the use of the information. For enquires/research queries, please send an email to research@gti.com.ng 5