United Capital Plc has embarked on a transformative capital restructuring that could significantly influence its future trajectory and investor sentiment.
At an Extraordinary General Meeting held virtually on August 21, 2024, the company unveiled a bold plan to triple its share capital from N3 billion to N9 billion. This move includes issuing 12 billion new shares at 50 kobo each, which will raise the total outstanding shares from 6 billion to 18 billion. Central to this restructuring is the reallocation of N6 billion from retained earnings to share capital, effectively converting these earnings into equity, though it will also further deplete retained earnings.
As of June 2024, United Capital’s retained earnings had already declined by 9.7% to N28.67 billion, partly due to the company’s first-ever dividend payout of N0.90 per share for the first half of 2024. For investors, this restructuring presents both opportunities and challenges, demanding a careful assessment of its potential impact on the company’s profitability, future dividends, and financial stability.
The decision to use retained earnings to fund the bonus issue signals confidence in the company’s financial health. By increasing its share capital, United Capital not only strengthens its balance sheet but also enhances its financial flexibility, positioning itself for potential growth. However, the significant increase in the number of shares could lead to earnings dilution, potentially lowering earnings per share (EPS) unless offset by substantial profit growth. This could affect the company’s valuation and investor sentiment.
The critical question for investors is whether United Capital can sustain the profitability needed to counterbalance the effects of this restructuring. Historically, the company has demonstrated robust growth, with pre-tax profit increasing at a compound annual growth rate (CAGR) of 37% over the past five years, reaching N17.3 billion in 2023. EPS has also grown at a CAGR of 23%. This upward trend continued into the first half of 2024, with pre-tax profit rising by 63% year-over-year to N9.1 billion, outpacing the company’s five-year CAGR.
Group CEO Peter Ashade has expressed optimism about sustaining this momentum, highlighting the company’s strong first-half performance in 2024, including the historic interim dividend and bonus shares. He emphasized the company’s robust financial position, managing nearly N1.3 trillion in client funds, and its commitment to delivering value to shareholders.
Despite these reassurances, a closer look at the first half of 2024 results reveals a mixed picture. While gross earnings grew by 38% year-over-year to N15.15 billion, this represents only 33% of the total gross earnings recorded in 2023 and trails the company’s impressive five-year CAGR of 53%. The deceleration in gross earnings, despite growth in fee and commission income, is partly due to rising interest expenses, which have outpaced the growth in interest income, narrowing the company’s net interest margin and putting pressure on profitability.
Currently, United Capital spends over 89% of its interest income on covering interest-related expenses, leaving a thin margin for profitability. This tightening margin could signal challenges ahead, especially if interest expenses continue to rise.
Nevertheless, the company’s EPS growth in the first half of 2024 remains impressive, growing by 65.4% to N2.58, which is about 37% higher than the 2023 figures. However, with the bonus issue tripling the number of outstanding shares, the potential for earnings dilution is significant. To maintain the 2023 EPS of N1.90 with the increased share count, the company would need to achieve a profit after tax of approximately N34.2 billion, a considerable leap from previous profit levels, underscoring the challenge of maintaining valuation.
The bonus issue, while reflecting confidence in the company’s financial health, places greater pressure on future profitability to avoid diluting shareholder value. If United Capital cannot achieve the necessary profit levels post-restructuring, it could lead to earnings dilution, a lower stock valuation, decreased investor confidence, and potential cuts in dividends.
Moreover, a decline in EPS could result in a higher price-to-earnings (P/E) ratio if the stock price remains constant. Investors typically view a rising P/E ratio, driven by declining EPS, as a warning of potential overvaluation, which could trigger negative market reactions. This concern is amplified by United Capital’s recent share price performance, which has been bearish in 2024, with a 14.13% year-to-date loss as of August 23, 2024, compared to a 64.3% gain in 2023.
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Investors must carefully consider the impact of this capital restructuring on United Capital’s ability to sustain its growth trajectory and maintain strong earnings performance. The company’s success in navigating these challenges will be crucial in determining whether its stock can regain upward momentum or continue to face downward pressure.
