United Capital Plc (UCAP) demonstrated remarkable earnings growth in the first half of 2022, despite facing challenges from increased operating costs. Over the past five years, UCAP’s earnings grew significantly at 23% per year. In FY 2021, the company achieved a remarkable earnings growth of 44.14%, with net profit reaching N11.259 billion compared to N7.811 billion in the previous year.

This impressive performance translated into a net profit margin of 62%, driven by a substantial revenue growth of 40.32%, primarily due to a substantial % increase in fees and commissions by 78%.

However, in H1 2022, UCAP experienced a slowdown in its operating profit before tax, profit before tax, and profit after tax due to higher overhead costs and impairment for credit losses resulting from market and economic dynamics.

Despite this, the company managed to achieve positive growth. Gross earnings in H1 2022 grew by 33% sequentially and 50.43% year-on-year, reaching N9.112 billion compared to N4.437 billion in H1 2021.

However, due to higher personnel expenses, other operating expenses, and credit loss impairments, the growth rates of operating profit before tax, profit before tax, and net profit margin were 35%, 40%, and 41%, respectively. Notably, the impairment on credit losses grew by 14% compared to the previous year and a significant 222% sequentially, amounting to N1.009 billion in H1 2022. This increase in operating costs led to H1 2022 earnings of N4.437 billion, accounting for 39.41% of the 2021 FY earnings, indicating a deviation from the earnings forecast based on the 2021 FY performance.

Despite these challenges, UCAP managed to maintain consistent and impressive margins, resulting in robust earnings per share growth. The company’s net profit margins for that period stood at 68.7%, surpassing the previous year’s margin of 60.8%. Earnings per share also grew by 40.95% to N1.48 in H1 2022 from N1.05 in H1 2021, accounting for 79% of the 2021FY earnings per share, which experienced a growth rate of 45% to reach N1.88 from N1.30 in 2020.

UCAP boasts a solid track record and maintains a strong balance sheet with a total balance sheet size of N531.791 billion as of June 30, 2022. Retained earnings constitute just 4.5% of the balance sheet, while share premium accounts for only 0.1%. However, the company’s retained earnings decreased to N24.096 billion in H1 2022 from N28.661 billion in H1 2021, primarily due to the N9 billion dividend payment made for the 2021 FY.

Considering these factors, UCAP presents a compelling investment case. As a leading African financial and investment services group, the company offers a range of bespoke value-added services, including investment banking, asset management, trusteeship, securities, and insurance. UCAP has been listed on the NGX since January 13, 2013. With 73% of the company’s shares owned by the public, UCAP is compliant with the NGX’s 20% public float requirement. The stock’s liquidity is also noteworthy, as it is the 23rd most traded stock on the NGX over the past three months, with an average daily trading volume of 1.89 million shares.

In terms of capital gain performance, UCAP outperformed the NGXASI and NGX30. While the NGXASI and NGX30 gained 15.7% and 4.31% respectively, UCAP achieved a 25.25% gain year-to-date, positioning it as the 27th best-performing stock on the NGX. Although the stock experienced a slight drop in share price from N12.55 to N12.40 per share, the overall performance remains positive. Additionally, UCAP’s dividend yield of 12.10% places it in the top 25% of dividend payers in the NG Market.

Furthermore, when considering earnings per share, UCAP appears undervalued. With an earnings yield of 15.16% and a price-to-earnings (P/E) ratio of 6.6x, compared to the African Capital Markets Industry average P/E ratio of 9.5x, NGX market P/E ratio of 8x, and FG 10-year bond yield of 12.686%, UCAP’s shares are priced attractively.

Looking ahead, UCAP may face challenges from increasing overhead and impairment costs due to various factors such as inflation, energy crisis, equity risk, and exchange rate risk. Already, the growth rates of overhead and impairment costs are higher, while investment income and other income growth rates are lower. The company needs to diversify its operations and mitigate market risks to create customized business opportunities within the operating environment.

Overall, despite the challenges posed by higher operating costs, United Capital Plc has managed to maintain consistent earnings growth and impressive margins. The company’s solid track record, compliance with market regulations, liquidity, and positive performance indicators position it as a compelling investment opportunity in the financial and investment services sector.

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