Transcorp Power Target Price Put at N323 as Shares Surge 10%

Transcorp Power shares which were listed by introduction at N240 per share on the NGX Monday has attracted a target price of N323 per share, even as it jumped 10% on its first day of trading.

“We initiate coverage on Transcorp Power Plc (TPP) with a 12-month Target Price and projected market capitalisation of N323.64 and N2.4 trillion, respectively,” said Cardinal Stone Partners analysts as they initiated coverage of the stock.

“Our TP implies a price return of 22.6% and a BUY recommendation on the stock. Our outlook on the stock is premised on projected improvements in return metrics.”

Transcorp Power closed trading up 10% to N264 per share on Monday.

The company currently accounts for 7.0% of Nigeria’s installed grid capacity but generates 10.0% 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.

Analysts say 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 75.0% over the last five years is also materially higher than the mean of 48.0% for Emerging Markets (EMEA) peers over the same period.

The government’s plan to clear legacy debt owed to power sector players also 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, analysts say.t

Transcorp acquired the 972MW gas-fired Ughelli Power Plant and ramped up its generations from 160MW to 701MW within four years of taking over the plant.

Ughelli Power Plant is the first privatized power company to be discharged from post- privatization monitoring having surpassed all set targets by the BPE and the National Council on Privatisation.

Transcorp power generated revenue of N151.25 billion in 2023, which is 46.48 percent higher than 2022’s N103.27 billion. It grew revenue at a compound annual growth rate (CAGR) of 25.2% between FY’19 and FY’23, aided by improvement in capacity utilisation.

The exportation of power generated accounted for 16.1% of revenue in FY’23, compared to 3.3% in FY’20. The FX inflows from this strategic exportation partially helped the company offset some of the negative impact of the naira devaluation across some other lines of the financial statements.

The company’s primary export market is the Republic of Benin, and it is pushing to expand
into other West African territories.

Over the last five years, Transcorp Power grew EBITDA and EBIT by CAGRs of 33.9% and 36.1%, respectively. Consequently, TPP reported a 6.8ppts expansion in EBITDA margin to 43.5% between FY’19 and FY’22 and a further 4.5 percentage pointts increase to 48.0% in FY’23.

Risks to valuation expectations however include: risk of Naira devaluation, competition, unfavourable changes in interest rates, and higher trade receivables balances.

“Our expectations for operating cash flow and dividend paid CAGRs of 17.4% and 26.1%, respectively, between FY’24 and FY’28, are likely to keep investors mostly interested in the stock in the near to medium term,” Cardinal Stone analysts said.