Is something fishy going on at Custodian Plc? – Nairametry
Custodian Plc, one of Nigeria’s largest insurance companies, is currently trading at a high of N7.10 for the new year and is up 21% since the start of the year. The Nairametrics Blurb team has noticed a surge in its share price in recent days, especially since the company announced its AGM.
As of this writing, approximately 2.9 million units have been traded at the share price of N7.
The stock is included in the pensions index and to some extent quite illiquid. It is also one of the stocks recommended in our Premium Service Stock Select newsletter, hence the need for further introspection.
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Custodian Investment AGA
Typically, when companies announce AGMs, we are very curious because this is where decisions that may ultimately affect shareholders (especially small retail investors) are approved.
In its recent filings, the company stated the following in point 10.
That the Board of Directors of the Company be and are hereby authorized to:
(a) raise the naira equivalent of up to $ 15,000,000.00 (fifteen million US dollars) as additional capital through a convertible loan instrument;
(b) convert the loan in Naira equivalent up to $ 15,000,000.00 (fifteen million US dollars) into shares of the Company (the “Conversion Shares”) at a conversion price, whichever is the greater of N6 per share or the 12-month historical average daily price of the Company’s share derived from the official daily listing of the Nigerian Stock Exchange (for the period ending March 23, 2021), subject to adjustment in the event the occurrence of certain adjustment events;
(c) allot the Converted Shares to the Lender upon exercise by the Lender of its right to convert the Loan into Company shares, subject to applicable law; and
(d) take such action as is necessary or reasonably desirable to give effect to the foregoing resolutions and to effect any transaction thereunder, including appointing professional advisers and obtaining relevant regulatory approvals.
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What does that mean?
In plain English, Custodian’s directors are seeking approval from its shareholders to borrow $ 15 million (N 6.1 billion) as a convertible loan instrument.
A convertible loan instrument is simply a loan that you can convert into shares if the lender so chooses. The share price for the conversion is predetermined and in this case they have given N6 per share or the historical average share price of the company over 12 months.
If the lender decides to convert the loans into shares at the current price of N6 per share, it means that approximately 1 billion shares will be offered to the lender, or the equivalent of 17.4% of the total outstanding shares of the company. This loan indeed constitutes a potential dilution of the existing shareholders of the company if it is approved at the AGM.
So why is the company looking for a convertible loan or even diluting its shareholders?
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In search of why
Typically, when a company decides to raise funds through a convertible loan instrument, it seeks lower interest rates, debt that avoids the burden of periodic repayments and / or seeks to delay issuance of equity. Tax considerations are also involved, but not as important as those mentioned above.
Except that the custodian is looking to buy another asset, after buying UPDC, we don’t understand why it will seek to raise capital large enough to dilute the existing shareholders. He also did not explain why he sought to increase said capital in his notice of general meeting, a slight deviation from the norm in cases like this.
- The custodian is also heavily capitalized with net assets of around 46 billion Naira and a balance sheet of 176.1 billion Naira (after the acquisition of UPDC) as of 2020.
- Suffice it to add that the company recently paid shareholders around 2.6 billion naira in dividends, which makes us wonder why it is seeking to dilute shareholders when it could have simply spent that amount on its capital raising needs.
- In fact, dividends paid in 2020 were only 21% of profits, meaning he had retained around N10 billion in profits made during the year. Again, why does he need 6.1 billion naira in loans?
- The custodian also has a thriving insurance business which has earned it around 58 billion naira in gross premium income, including 32 billion naira in non-life. Again, why does he need 6.1 billion naira on convertible loans?
- The company currently has approximately N5.5 billion in debt inherited from its acquisition of UPDC. Debt is primarily a bond issued at an interest rate of 16% per annum and which is fully liquidated in 2023.
- There is no rush to pay off this debt.
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Then what ?
We do not know why the company is seeking to raise this capital and can only think of two reasons. First, could existing shareholders seek to increase their stake in the company? The majority shareholders of the depositary are Gratitude Capital Limited and Mikeade Investments Limited with 22.48% and 15.72% respectively.
- Company CEO Oluwole Oshin represents Gratitude Capital while business mogul Micheal Ade (Elizade) owns Mikeade Investments Limited. Could it be either of these two investors looking to increase their stakes?
- There could also be a reason for this backdoor approach. About 74.5% of the company is owned by just 20 shareholders, so it is clear that increasing majority stake will be difficult to achieve.
- The other reason may be an institutional investor looking to acquire a significant stake in the company through the backdoor. Is it plausible?
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Well, these are speculations that only Cusdotian can confirm. We hope they will do so as soon as possible.