United Capital Plc, a Nigeria-based financial and investment services company, has been hit by rising operating expenses that eroded margins as the company’s half year profit slumped.
For the first six months through June 2017, United Capital’s net income declined by 44.39 percent to N2 billion as against N3.59 billion earned in June 2016.
The drop profit was caused by a 39.65 percent rise in total operating expenses to N1.49 billion.
The rising operating expenses eroded profit margins of the Nigerian investment firm as net margin plunged 46.69 percentage points to 51.50 percent in June 2017, from 98.19 percent as at June 2016.
Similarly, cost to income ratio, another measure of efficiency rose to 38.62 percent in June 2017 from 29.33 percent the previous year, highlighting management’s inefficiency in resource use, a threat to profitability.
Analysis of the financial statement of the company showed that admin expenses, which spiked 59.60 percent, and staff expenses, which rose 23.57 percent within the period, were major drivers of cost surge.
Return on equity (ROE) therefore dropped to 13.60 percent in the period from 25.20 percent the previous year. Again, this means that United Capital’s management was unable to profitably utilize the resources of the company, thus eroding the wealth of shareholders.
The company said last year that high net worth customers are shunning equities and moving assets into fixed income to beat market uncertainties.
United Capital committed up to N60 billion in the last two years to underwrite bonds issued by various governments and corporate issuers.
Nigeria raised $500 million in local currency-denominated bonds of various maturities at an auction on March 21 2017, with yields ranging from 5.31 percent 6.75 percent. The country’s Eurobond was oversubscribed as the country got $3 billion from investors.
The Nigerian Stock Exchange (NSE) main index for equities has gained 23.69 percent this year as banks stocks have been rallying since the Central Bank introduced the new foreign exchange window that eased liquidity.
As Nigeria plunged into its first recession in over two decades, there are signs of economic respite since the International Monetary Fund (IMF) has estimated that output of Africa’s biggest economy will grow at 0.8 per cent in 2017.
These forecasts were revised up mainly to reflect high oil production due to security improvements.
This latest development could result in foreign portfolio investors flocking into the country and swooping on the assets they abandoned on the back of uncertainties surrounding Central Bank’s policies.
Further analysis of the financial statement of United Capital shows that gross earnings fell by 6.05 percent to N3.87 billion in June 2017 from N3.65 billion the previous year; net operating income was down 5.78 percent to N3.21 billion.
United Capital’s investment in treasury bills, categorised under financial assets held to maturity, fell by 68.97 percent to N6.51 billion while state government and corporate bonds stood at N11.71 billion and 8.01 billion respectively.
Treasury bills, categorised under financial assets held for sale fell by 43.11 percent to N5.43 billion while bonds and equity collective investment scheme stood at N14.29 billion and N19.38 billion respectively.
The firm’s shares fell 3.09 percent to N3.02 per share at the close of trading in Lagos, on Wednesday, valuing it at N18.60 billion.
BUNMI BANJO
