Tuesday, January 22, 2019 1:03:12 PM- Nigerian Stock Exchange.



  Better prospects on the cards for C&I Leasing PLC

      

C & I Leasing Plc is looking to raise N7 billion via series 1 of its N20 billion Debt Issuance Programme. Proceeds from this series is to be used to finance maturing bank loans as well as finance ongoing business expansion across its business segments. Given its current funding structure, with 33% of borrowings in form of short dated instruments, and 54% of total loans due for maturity during the year, we believe the bond programme will afford the company a longer-term financing option for its ongoing capital expenditures.


Notwithstanding the surge in borrowings over the last 5 years, which touched N28 billion in FY 17, the company’s coverage ratio (EBITDA/Interest Expense), is still largely in check with the EBITDA of N12.6 billion being over 3x interest expense of N3.5 billion as at FY 2017.


With average yields on government bonds down 329bps YoY to 13.4% (5-year bond: -256bps YoY to 13.5%), we expect a moderation in finance cost over 2018 following the refinancing programme. For context, extrapolating from the recently issued FGN 5-year bond of 12.75% and assuming a spread of c.300bps, we estimate a 5.0% decline in funding cost over 2018 to N3.3billion. Estimating coverage ratio on our estimated funding cost, we expect a ratio of 4x over 2018.

  

Business Description


  • C & I Leasing Plc (incorporated in 1990 and listed on the Nigeria Stock Exchange in 1997) operates as a holding company with significant interest in three subsidiaries (C&I Leasing: 100%, Leasafric: 70.9%, Epic: 100%). The company provides finance lease, marine services, vessel tracking services (Citracks), Fleet management and professional consulting services (human resources outsourcing). The company has four core business segments; Lease rental, Outsourcing services, Vehicle sale and Tracking services.
  • As at FY 17, Lease income contributed the largest share of revenue (65% of gross earnings from 54% in FY 16), followed by Outsourcing income which contributed 29% (vs. 35% in FY 16) to cumulatively account for 95% of gross earnings in 2017 (vs. 88% in FY 16). From earnings perspective, lease income remains the largest cash cow of the group. For context, while net outsourcing margin printed at 11% (vs. 12% in FY 16), net lease margin came in at 65% - albeit below the level over 2016 of 67%.


High leverage...a dissipating concern


• Following the company’s business expansion drive, its leverage position grew from N10.9 billion in FY 2012 to N28.9 billion in FY 2017. However, given the impressive earnings growth, retained earnings grew from a low of N431 million in FY 12 to N7.3 billion in FY 17, with overall equity rising by a CAGR of 31.8% over the period. Accordingly, the company’s Debt to equity ratio improved from 6.4x in 2012 to 3.2x in FY 17 with leverage ratio (Net debt to EBIT) declining from 51.6 to 5.8. Overall, we highlight that the company’s coverage ratio (EBITDA/Interest Expense), is still largely in check with the EBITDA of N12.6 billion being over 3x interest expense of N3.6 billion as at FY 2017.

              

Loan restructuring/refinancing to moderate funding cost


• Given the risks associated with its current financing structure, C & I is looking to raise N7 billion. Proceeds from this series is to be used to finance maturing bank loans as well as finance ongoing business expansion across its business segments. Given its current funding structure, with 33% of borrowings in form of short dated instruments, and 54% of total loans due for maturity during the year, we believe the bond programme will afford the company a longer-term financing option for its ongoing capital expenditures.


• With the short-dated nature of its funding leaving the company largely exposed to short term changes in market liquidity and associated swings in borrowing cost, we believe the bond programme would afford the company a more flexible and cheaper borrowing cost. For context, as at FY 17, the company weighted average cost was 12.1% – a 96bps expansion from 11.2% in FY16. However, given the high maturity profile during the year and its current cash position, we expect the company to rollover most of the maturing obligations during the year, albeit at lower costs. As such, we expect a 15% YoY growth in borrowings to N33 billion.


• With average yields on government bonds down 329bps YoY to 13.4% (5-year bond: -256bps YoY to 13.5%), we expect a moderation in finance cost over 2018 following the refinancing programme. For context, extrapolating from the recently issued N38.29 billion 5-year 12.75% sovereign bond, we estimate a 5.0% decline in funding cost over 2018 to N3.3billion. Estimating coverage ratio on our estimated funding cost, we expect a ratio of 4x over 2018.


Impressive earnings growth... finance pressure persists


• C & I leasing risk profile improved over 2017 following the groups’ business diversification across segments. Specifically, the company grew its marine operations with 25 operational vessels (18 owned vessels and 7 vessels on charter), with all owned vessels on a minimum of 5 years fixed contract while chartered vessels are on short tenure rolling contract. Reflecting the investments across business lines, the company has maintained a consistent top line growth between FY 2012 and 2017, with an average annual growth rate of 16%.


• Also, EBITDA has maintained an upward trajectory over the review period, rising by a CAGR of 67% between FY 12 and FY 17 (+225 YoY). As a result, despite the appearance of finance cost of N3.3 billion in FY 14, EBITDA/Interest Expense printed at 2.1x. Father out, with the rising borrowings alongside associated cost, interest coverage worsened to 3.4x in FY 16, with a slight moderation to 3.2x in FY 17.


FROM: ARM SECURITIES LIMITED. ("ARMS")



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