A considerable number of us do not plan for life in retirement. Unfortunately, our future financial security is not determined by how much we are making now, but how much we can keep and for how long. Corporate and government pension schemes have proved to be unreliable. In Britain, they talk about Self-Invested Personal Pension (SIPP) while the Americans call it Independent Retirement Account (IRA). No matter the nomenclature, you have to make an alternative provision for yourself.
It is estimated that we will need about 60% to 70% of our current income after our active years are over. We can estimate the amount we will need at old age. First, estimate how long you will live for after retirement (say 30 years); then multiply by 60% of your current income (say, 60% of NGN1.2m per annum= NGN720, 000). Thus, you will need NGN21.6m during your old age (30x NGN720, 000). Divide NGN21.6m by the number of years to retirement (how long you still need to work), say 25 years, you need to save NGN864, 000 annually (NGN72, 000 monthly). Using the power of compounding to your advantage, you do not need to save NGN72, 000 monthly for retirement. Assume you invest at 10% interest for annum, you need to save a total of NGN1, 993,594 now (NGN21.6m= P (1.1)25)! You could save what you need to secure your future in less than 5 years.
The following are guides on securing your future:
1.Reduce your liabilities: Liabilities are things that drain your financial resources, e.g. car loan, mortgage and so on. Reducing them will help increase your savings which can be used for investment purposes. Wise people save first and spend the remainder, not spend first and save the remainder.
2.Stocks Investing: Stocks offer a much higher return but is risky if you are not financially informed. However, when you do your homework, you could profit from the ignorance of other market participants.
3.Real Estate: This investment vehicle is safer than stocks but has a lower return. A great obstacle is the huge capital requirement which makes it available to only those with enough capital.
4.Treasury Bills and Government Bonds: These are government securities that are completely risk-free. However, their returns are very low.
5.Insurance: It is a good investment. One could become an annuitant receiving a fixed payment for a specified period or for life after retirement. However, a lot of us in this part of the world have yet to embrace it.
6.Emergency Fund: Keep fund for exigencies. It could be in a bank savings or any other liquid asset.
STOCK RECOMMENDATIONS
Courteville Investment Plc
Profile
Courteville began operations as a financial services provider in January, 2005. In a bid to remain relevant in the fiercely competitive financial services sector, it embarked on elaborate research. This culminated in the identification of a vacuum in motor vehicle administration and other public processes, and the subsequent development of an e-platform to provide business solutions.
AutoReg, which is the major product, automates motor vehicle licensing for the government while its affiliate, AutoReg Hackney issues a certificate, which is renewable annually, to owners of motor vehicles and motorcycles operating within a state. Other product offerings include AutoInsure, AutoReg Inspector, AutoReg Enumerator and AutoRegtive Shopping.
Strategy
The business solutions sector is, indeed, a very dynamic one; its success depends to a large extent on a robust information technology (IT) infrastructure. Therefore, the company has expended large sums of money (NGN1.2b at 2009 year end) to re-engineer its IT infrastructure in order to keep abreast of new technology and prevent business disruptions. This has, no doubt, impacted earnings positively-amid the economic quagmire.
AutoReg, which was first launched in Lagos, has now been deployed in additional 11 states in Nigeria. Decisive efforts are being made to penetrate some countries in Africa. This African Expansion Project which gulped NGN4.1m in 2009 may bear fruit soon as negotiations have reached an advanced stage in few countries.
Besides, more products are being developed to maximize Courteville's platform capacity. During the year (2009), products like AutoReg Property Revenue Manager, Education Management System and AutoReg Insurance Verification Enterprise Solution were developed. We believe that the innovation of the management will pay off if only it is supported with concrete marketing campaign.
Management and Corporate Governance
The board, which comprises 7 directors, is chaired by Chief (Dr.) Michael Ade Ojo. Mr. Adebola Akindele, the Managing Director, leads the management team. All the directors seem to be dedicated since they have a high stake in the business; they control 55.2% of the company up from 52.2% of 2008. Judging by the performance parameters, the board and management have performed above average.
Financials
Income grew by 50.6% in 2009 compared with 92.1% achieved a year earlier. Commissions from AutoReg business accounted for 70.5% of gross income. Though e-commerce contributed 4.1% of revenue, it was better than 0.6% of 2008. Profit After Tax (PAT) dipped 33.6% owing to diminution in the value of investment and increasing costs. Cost to turnover ratio increased by 13.5% to close at 45% while selling and administrative expenses to turnover ratio rose from 20.7% in 2008 to 26.9% in 2009. Earnings Per Share (EPS) lost 33.3% in the period owing to decline in PAT. Operating margin decreased to 28.1% down from 47.8%. Although shareholders got 65.3% of PAT as dividends, returns nosedived; both Return on Equity (RoE) and Return on Assets (RoA) went down by 4.1% and 3.5% respectively.
Courteville does not, in any way, have difficulty in meeting its obligations to creditors as interest cover is15.4 times and current ratio is 2.7. Courteville is highly solvent; long-term debt is less than 2% of shareholders' fund while its total liabilities are 12.8% of it. Despite the huge capital investment, Courteville is not highly geared. Even its operational cashflow can pay its interest 10.4 times and its long-term debt 4.1 times. Long-term loans from both Oceanic Bank and Fidelity Bank are 19.5% of current net earnings. So, Courteville is financially strong.
Valuation
Courteville has a trailing P/E of 8.2 times which when multiplied by its historical EPS of NGN0.06 translates to a price of NGN0.5. Using DCF analysis, we arrived at a price ranging from NGN1 to NGN2.1 for a share. Its book value is N0.83 per share.
We expect a 3-year compound annual growth rate in revenue and net earnings of 34.3% and 32.9% respectively. The expected return a share of the company in three years is 39.9%.
Thesis
Despite the increase in the number states that used AutoReg in the period (5 additional ones), profitability and returns to shareholders dropped. We are of the opinion that the recession took a heavy toll on Courteville's business. And the expenses incurred in research and development will pay off going forward. Also, expenses incurred to gain new grounds should be worth the while.
Furthermore, the patent granted Courteville in twelve states is commendable. Courteville has less financial risk and it is trading below its fair value estimate.
Business Risk
Courteville's business is largely technology- driven; research and development was 44.1% of total assets in 2009 (47.4% in 2008). So, technological changes will require huge capital investment which could threaten operational cashflow and profitability.
Besides, commissions from the 12 state governments using AutoReg form a bulk of its revenue (70.5% in 2009; 72.5% in 2008). Though there is no doubt about the credit-worthiness of these state governments, a change of policies could pose a danger to Courteville. As the major buyers, the governments have a high bargaining power; they could negotiate for better deals that may have adverse effect on Courteville's revenue.
However, management is not resting on its oars; it is working on improving the contributions of its other e-commerce products. In 2009, they contributed 4.1% compared to 0.6% of 2008.
Economic Moat
Courteville has an average competitive edge, having obtained a 20-year patent on its AutoReg business in Nigeria. Also, governments may be reluctant to change to another service provider because of the high costs of shifting its already automated vehicle administration system. In other words, its major customers may be locked-in.
Its African Expansion project, if successful, could help consolidate its hold on the market.
RECOMMENDATION: Buy
Vital Statistics
Recent Price: NGN0.50
Fair Value: NGN1.00-NGN2.10
Buy Below: NGN1.00
Competitive Advantage: Medium
Earnings Stability: Medium
Expected Return: 39.9%
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