In this article, I use both Financial Ratio Analysis techniques along with a price target estimation based on a quick analysis pegged on earnings to illustrate the reasons I believe Centum is undervalued and has a solid business model over going forward. I also compare the company with Transcentury just to accentuate its good quality.
Financial Ratio Analysis
P/E Ratios
| Centum | Transcentury | |
|---|---|---|
| Current P/E Ratio | 15.19 | 18.21 |
| Maximum P/E Ratio in last 5 Years | 18.43 | 32.94 |
| Upside to Maximum | 21.33% | 80.99% |
Profitability
| Centum | Transcentury | |
|---|---|---|
| Net Profit Margin | 64.25% | 5.31% |
| Operating Profit Margin | 86.68% | 2.77% |
| ROE | 18.39% | 12.05% |
Liquidity
| Centum | Transcentury | |
|---|---|---|
| Current Ratio | 6.12 | 1.49 |
| Cash Ratio | 5.22 | 0.06 |
Solvency
| Centum | Transcentury | |
|---|---|---|
| Long-Term Debt to Total Assets | 0.22 | 0.16 |
| Financial Leverage (Total Assets/Equity) | 1.39 | 1.80 |
| Debt to Equity | 0.39 | 0.36 |
Activity
| Centum | Transcentury | |
|---|---|---|
| Receivables Turnover | 14.98 | 7.67 |
| Total Asset Turnover | 0.21 | 0.50 |
Sources: Financial Reports
On a Price/earnings ratio (P/E) basis, we can see that Centum currently trades at a significant discount to the maximum P/E ratio achieved in the last four years. Transcentury trades at a steep discount relative to its maximum P/E ratio. While the latter spots a large discount to its maximum PE ratio, it is my opinion that Centum retains a better business model going forward.
Centum shows significantly higher profit margin than Transcentury for the year 2013, and I forecast that Centum will increase profit margins substantially going forward based on its entry into infrastructure projects (recently the company emerged the winning bidder of the government’s tender for development of a 1,000MW coal fired power plant to be located in Lamu County) and continued investments in real estate. I believe these will significantly bolster margins in the future. It will be interesting to see how the ‘’new projects’’ will affect future revenue stream keeping in mind these type of projects are long-term in nature.
Whilst its debt/equity ratio is higher than Transcentury’s, note that the company is still able to generate more cash on a liquidity basis, despite Transcentury’s having lower debt/equity ratio and lower long-term debt/total assets ratio than Centum. It is therefore my opinion that as long as Centum can continue to increase profit margins and generate adequate cash, then a high debt/equity ratio would not be as great concern.
| Earnings Per Share Forecast (EPS)(2015-19) | |||||
|---|---|---|---|---|---|
| 2015E | 2016E | 2017E | 2018E | 2019E | |
| Projected 20% EPS Growth | 3.77 | 4.52 | 5.43 | 6.51 | 7.82 |
| Current P/E Ratio | 16.18 |
| Terminal P/E* Estimated 2019 EPS | 126.49 |
| Target Price in Year 2018 | 142.67 |
| Upside from current price of KES 61 (as at close of May 2015) | 135.82% |
| 5-Year Projected Annualised Return | 25.29% |
Valuation
Using an earnings growth rate of 20% (average EPS growth rate between 2011-2013), I forecast growth in earnings on a terminal P/E basis to forecast a target price of Kshs. 142.67 for the year 2019.
Conclusion
To conclude, I believe Centum’s expected increasing profitability and potential upside on a value basis make it a good business going forward. Centum does appear to have adequately positioned itself to capitalise on the infrastructure investments in the country, and on this basis Centum has my vote.
