Latest / Green Ticker Tales / ABC Transport may be overvalued

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ABC Transport may be overvalued · Green Ticker Tales

• 0:00
  so ibc transport was the best performing stock last week it caught my eye i decided to dig in a bit further let's let's take a brief look at the financials now looking at q1 numbers uh top line growth in top line 4.26 billion naira in revenue for q1226 up 17.5 percent year on year a profit after tax of 239.6 million up by 7.39 percent so revenue grew faster
• 0:30
  than profit. Why is that the case? You had your admin expenses grow faster than revenue. You had your direct costs grow slightly faster than revenue. This is a thin margin business. I don't like thin margin businesses.
• 0:50
  a profit margin of 5.62 percent for q1226 means that for every 109 revenue only 5.69 was profit and there is a high inflation environment so i like businesses that have huge
• 1:03
  or large profit margins because a lot of times the high inflation environment the uncertainty unstable economic environment means that sometimes it's difficult for companies to pass on this cost at once to businesses whenever there are shocks there are price costs or cost shocks it takes a couple of years a couple of quarters before firms can fully pass on this cost to customers so i like to see a large profit margin as a
• 1:30
  buffer in terms of return on assets 5.62 percent as a q126 return on equity at 9.9 percent if you analyze those figures it means the firm this is the run rate uh this firm abc transport should easily end the year with 22.46 percent annualized return on assets and return on equity of 39.6 percent in simple times for every hundred nine assets
• 1:56
  if this run rate continues they would generate a return of 22 naira and for every 100 naira um in equity they will generate a return of 39.6 naira so those will be a stellar set of numbers now in my view i think this stock has run a bit and i'll give you my reasons why if you are looking at the um market cap to
• 2:24
  annualized free cash flow market cap 18.6 billion annualized free cash flow of 240 a million so if you take your market cap divided by the free cash flow it means that the firm is trading about 77.7 times is free cash flow simply put i put this question to you would you buy a company uh for 8.6 billion with the market uh a company with a free cash flow
• 2:51
  of 240 million uh would you buy it for 18.6 billion the answer is no to take you 77 years to recover your investment based on the free cash flow so yeah one or two things either this free cash flow as it relates further and i don't see it accelerating even further or you have the the market cap decline in my view i think this stock should probably be trading 40 to 50 percent lower than where it is so
• 3:19
  um my target price probably somewhere between three to four naira depending on the method you use if you're going by p e ratio at current price of 7.8 and my estimated fy 206 any special 45 cover will mean the stock is trading at 17.3 times multiple in my view target price would probably be a 9x multiple and so that's the 0.45
• 3:44
  and multiply it by nine that gives you four nine and five couple now in terms of free cash flow have a target market cap of 30 times free cash flow that puts it at the market cap of 7.2 a billion and so that will give me a target entry price of three naira if you're looking at a price to free cash flow or a target market cap of 30 times free cash flow now if you blend the two figures together i mean if you want to be simplistic
• 4:12
  uh in the video you'd see where i gave my split of the blend but if you just want to be simplistic for the audio version of things and you take both 4.05 and add to 3.3 that gives you a 7.3 uh 7.3 divided by two let's see what that gives us uh that should give us about um three naira 65 couple so that would be my target price now i must admit chances
• 4:39
  of having the stock decline that sharply are quite low because you're looking at that's an almost what uh 50 or so percent decline a bit more than that that may not happen but i i i feel that this stock clearly has run uh i don't see any further upside in this stock fundamentally speaking i don't see any justification for a further upside for the stock but let's look at what technical analysis uh tells us
• 5:08
  um stock is at 7.8 and if you're going by technical analysis that would put it at just uh above the pivot point pivot point is 7.51 naira so for me the first support level is 5.93 naira i think the best place to get into stock will be sub 5 naira
• 5:33
  that would be a really good zone to get into this stock if you want to wait for the second support zone even better second suppose on s2 is 3.62 so somewhere around maybe four five nine or maybe five nine i want to start to get in i this for me is more of a a trading play than a dividend play or capital appreciation play because really the team margin business more so uh i think q2
• 5:59
  is when you start to see reflection of the higher energy cost and so if your profit margins are already 5.61 if you have more pressure in terms of energy cost those profit margins could even be squeezed because for myself i in my view i i wouldn't buy business with 5.6 percent uh profit margins it's it's simply in my view those numbers are simply uh not good enough they're not good enough so
• 6:29
  But that's just the way the logistics and the slash transport industry operates. It's a thin, thin margin business. I don't like thin margin businesses. But if the stock comes down to maybe 3, 4, 4.5, 5 Naira, one could take a punt on it, maybe just for capital appreciation, please. But these are my views. This isn't investment advice. In any case, as the video will be out at 8 a.m. tomorrow, you'll get some more context.
• 6:58
  i thank you for listening have yourselves a lovely rest of the day