Earlier this year, I took a look at DG’s 1Q18 earnings
and made some
predictions for the full year. A
best case 4.5% ROE or worst case a break-even year. As you’ll note, the best case falls well
short of what would be an adequate return given the risk profile of DG.
So how does AA’s prescient prediction
look with a full three quarters of data?
Frankly, not so good.
DG reported USD 41 million in net income for the first nine months of
the year. Pro-forming this for the full
year, would result in roughly USD 55 million for the full year or an ROE of
1.9%.
But to get a sense of the return
from ongoing operations, we need to exclude two special items. Those are USD 8 mm in 2Q18 sukuk
restructuring expenses and a 1Q18 reversal of 13 million in previously accrued
expenses. If we exclude both amounts—a net
of negative USD 5 million--, DG earned some USD 36 million over the first nine
months of the year. Pro-forming this over
12 months results in projected full year net income of USD 48 million or an ROE
of 1.7%.
Inadequate when one considers
what would be a normal ROE for a stock investment.
Dismal indeed when considers the higher ROE
that that a risky stock like DG should deliver.
To boot DG’s ROE remains well
below its current roughly 4% cost of borrowing which is artificially depressed
from the appropriate risk adjusted cost by the restructuring.
Of course,
there could be a miracle in 4Q18.
The hoped for settlement with NIOC
could materialize. The US Government
could graciously facilitate Iran's payment of the settlement proceeds to DG and,
perhaps, as well give DG a license exempting its transactions from newly
re-imposed US sanctions on Iran.
At this point, it appears that the best value creation opportunity DG has is to repay its debt in full. That will result in a net "benefit" of some 2.1% per annum to shareholders. Dividends are another option - as it might be expected that shareholders could find other investments to return more than 1.9% a year.
To
end on a rare (for AA) positive note,
all things are relative.
DG may
be a “mutt” investment, but AA suspects that investors in Gulf One Investment
Bank Bahrain might find it quite attractive.
Gulf1 has not reported a profit since
FY 2013 and appears poised to continue that "run" in FY 2018. Over the period FY 2014 through
FY 2017 Gulf1 “lost” (that doesn’t mean “misplaced”) some 57% of its total
equity: from USD 133 million at FYE2013 to USD 57 million at FYE 2017.
It’s hard to say how FY 2018 will turn out, though the loss this year for nine months is larger than for the comparable period last year. But as is well known providing an opinion on fiscal year audited
financials generally concentrates the minds of auditors more sharply than the signing off on interim unaudited financials. In 2017, the bulk of G1's USD 27 million loss was booked in 4Q.
On another somewhat positive note: Gulf1
is equity funded so there are no lenders with significant exposure and thus in significant
danger.
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