Stock Anatomy of Custodian Investment Plc (CUSTODIAN) 30/10/2020
For this week’s stock anatomy, we move on to the second stock in our NSE 30 universe, Custodian Investment Plc (CUSTODIAN). CUSTODIAN is a Nigerian company that belongs to the insurance industry group according to GICS classification.
Being a Nigerian insurance industry group member is significant today. The events that started with the EndSars protests and which have expanded into a full-blown crisis mean that insurance companies should worry bout some exposure. Before going into the details of the stock anatomy, a quick detour into a macro analysis of the insurance industry is necessary.
So much for the “efficient market hypothesis”
I watched the black Tuesday events that happened at the Lekki toll gate and my first thoughts were “there is going to be collateral damage”. The analyst in my head got to work and started piecing together what would be a macro-analysis for the capital market and, Bingo! I made what I thought would be a market-moving discovery.
In my experience with studying capital markets, I had come to understand how one event here would lead to precipitous reactions elsewhere, almost instantaneously. This process, where stakeholders were able to collectively receive the same publicly available information and interpret that information to come to a conclusion, and act on that conclusion immediately, is known as the “efficient market hypothesis“.
My” market-moving discovery” was based on this theory. I thought that with all these damages that were happening, in realtime, there was going to be a direct effect on insurance companies. I thought that depending on the size (financial) of the damage we could see Nigerian insurance companies take a hit. In ideal climes, the efficient theory should have made this information real and investors should start to price-in the potential losses that insurance companies could make. Thus I believed the insurance sector would start to sell-off.
What was the Insurance sector’s reaction to Black Tuesday?
You would expect that the market’s efficiency mechanisms would kick in and trigger some concerns. Nope! The Nigerian Insurance sector dusted the dirt off its shoulders and went ahead to make a new high for the year. It went one better, it broke the 2-year record as well, surpassing the 143.47 price it was last able to reach on the 4th of September, 2018.
For some reason, it appears that the market movers do not believe that insurance companies have anything to worry about. If they did, they would not buy the dips and push insurance companies to new highs. Anyway, with that out of the way, let us get back to the analysis of CUSTODIAN.
Price and Fair Value
Custodian Investment plc’s stock price at the close of business on Friday, 30th October 2020 was ₦6.05. The median price for the Insurance industry on the same day was ₦0.37. Interesting! If you are looking for the definition of creme-de-la-creme, you wouldn’t be too far off if you used CUSTODIAN as an example. CUSTODIAN is obviously perceived to be among the best companies in the insurance industry.
The median fair value of the Insurance industry group is ₦0.93 while CUSTODIAN’s fair value is estimated to be ₦9.22. CUSTODIAN is obviously worth its price and is in a different league of insurance companies.
1 Year Average Daily Volume – Measure of Liquidity
CUSTODIAN has an average daily volume of approximately 1.8 million shares. In contrast, the median of the insurance industry is approximately 600 thousand shares traded daily. This implies that CUSTODIAN is more liquid than most insurance companies that trade on the Nigerian Stock Exchange by a ratio of about 3:1.
Market Capitalization – Measure of Size
The market capitalization of CUSTODIAN is ₦35.5 billion. In comparison, the Insurance Industry has a median market capitalization of ₦3.2 billion, a scale that is 10 times larger than the industry group. CUSTODIAN is a larger insurance company than most others on the Nigerian Stock Exchange. You could say that CUSTODIAN is a large-cap Nigerian insurance company.
Dividend Yield
CUSTODIAN has a dividend yield (based on dividends paid in the last twelve months) of 7.44% while its Industry Group has a median dividend yield of 0.00%. A median of 0% infers that, at least, half of the insurance companies did not pay dividends and had zero yields. CUSTODIAN, by paying a dividend, is already set apart as a star performer.
Having a yield that compares with the median yield for the banking industry says a lot about the quality of the company. CUSTODIAN’s yield is in the top percentile of its industry. If you are invested in CUSTODIAN, you received returns that most other insurance companies investors did not enjoy. That should make you feel great, right?
Net Profit Margin
The net profit margin (based on profit and revenues generated within the last twelve months) of CUSTODIAN is 9.87% while the industry average ratio is 9.26%. This infers that CUSTODIAN generated a similar net profit figure to its industry group. Not significantly higher, but not bad still.
Price to Earnings Ratio (PE Ratio)
CUSTODIAN has a price to earnings ratio (based on earnings in the last twelve months) of 5.49 while the industry median ratio is 2.70. CUSTODIAN’s PE ratio might appear to be poorer than its industry’s but a closer look will show this is not the case.
While the ratio is 2x the industry’s median, it is still within the 0 – 20 target. We should also remember that its price is more than 16 times its industry median. With a price that much higher than its peers, and a PE ratio that is still so comparable, it means that the earnings figure of the company is also significantly better than its peers’.
Return on Equity (ROE)
CUSTODIAN has an ROE value (based on returns earned in the last twelve months) of 13.84%. The insurance industry’s median is 8.31% This implies that The equity owners of CUSTODIAN witnessed their company generate significantly higher returns on their equity than most insurance companies in the country.
Conclusion
These statistics point to CUSTODIAN as a company that is performing significantly better than most companies that offer insurance-related services. If you are looking to buy an insurance-related business in Nigeria, you should give this company a good look.
Having said that CUSTODIAN is a top Nigerian insurance company, we need to pay attention to the potential macro event that could pose threats to the profitability of companies in this group. A statement credited to the speaker of the Nigerian House of Representatives, Femi Gbajabiamila, claims that “it will take 1 trillion Naira to rebuild Lagos.”
If the statement above is true, we can assume that a good chunk of that money will be borne by insurance companies. This kind of event is what could end up as material extraordinary items on the financial statements of insurance companies for the year ended 2020. Keep an eye out for this if you own these companies.
To close, we would like to speak to the investor who does not want to wait for a weekly update. You might want access to the data that built this and we will say that we have you covered. A majority of the information that powers this resides in our Company Profiler. You can get access to a lot of information by visiting that site.
Till we see again, please invest responsibly.
