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Custodian Investment shines in Q1 2024 but needs enhanced cost management

Custodian Investment Plc

Custodian Investment has delivered an exceptional performance in Q1 2024, showcasing resilience in a challenging economic landscape.

The company’s pre-tax profit surged by an impressive 355% year-on-year to reach N11.970 billion, far surpassing its Q1 forecast by 171.6%.

The growth follows a robust 2023, where Custodian saw a 127% year-on-year increase in profit to N25.991 billion, well above its five-year compound annual growth rate (CAGR) of 35%.

The standout performance was driven by a significant 38% increase in insurance service revenue, totaling N28.293 billion in Q1 2024 alone, nearly half of the total revenue for the entire previous year.

This growth effectively offset related expenses, resulting in a significant insurance profit of N7.234 billion.

The improved insurance service profit of N7.234 billion, along with significant net insurance finance income and other revenue streams, caused the company’s net income and pre-tax profit to increase by 181% and 355%, respectively.

This is notably different from 2023, where the profit was also significantly boosted by an unrealized foreign exchange gain of N17.578 billion.

Overall, these results bolstered the company’s earnings per share. With trailing twelve months earnings yielding earnings multiples of 1.99x, below the sub-sector’s average price-to-earnings ratio of 5.6x, Custodian Investment’s stock may be perceived as undervalued relative to its peers.

Similarly, with a price-to-sales ratio of 0.41 and a price-to-book ratio of 0.74, both figures below the sub-sector average ratios of 0.51 and 1.34, respectively, indicate that the company’s stock is valued lower relative to its revenue and book value compared to the average ratios within its sub-sector

This suggests potential upside for investors looking to capitalize on the company’s robust growth trajectory and strategic positioning in the market.

Looking ahead, Custodian Investment has set ambitious targets for Q2 and Q3 2024 but given the substantial over-achievement of the Q1 2024 forecast, there is heightened confidence that Custodian Investment can meet or exceed its future targets.

The company’s strong performance could enhance investor confidence and brighten prospects for its stock, with investors anticipating continued strong performance and potential upside in future quarters.

The stock currently offers a relatively high dividend yield of 8.89%, supported by an upcoming dividend of ₦0.65 per share scheduled for payment on June 21, 2024.

However, it appears that the recent strong performance has not been fully reflected in the share price, which has only increased by 3.89% year-to-date.

This could be due to the market’s future expectations and risk assessments, where participants may be pricing in certain concerns.

Areas for improvement include addressing the company’s insurance service expense-to-income ratio, which remains a critical focus for sustained financial health and profitability.

High expenses relative to revenue have historically constrained net income growth, highlighting the importance of ongoing efforts to streamline operations and reduce costs.

In 2023, the company’s expense-to-revenue ratio for insurance services was 1.06, meaning expenses slightly exceeded revenue. This high ratio significantly impacted on the net income, which declined by 3.16% YoY to N18.725 billion.

In Q1 2024, the ratio improved, dropping to 0.74, indicating expenses were well below revenue during this period. Although this is an improvement from 2023, it is still relatively high.

Given that gross earnings are heavily reliant on the insurance business, particularly non-life, it is crucial for the company to strengthen strategies to reduce insurance service expenses, improve efficiency and consequently improve the expense-revenue ratio.

Investors should remain vigilant regarding the risks and challenges affecting market perceptions.

It is crucial to closely monitor the company’s strategic initiatives aimed at addressing underlying issues and ensuring sustained earnings growth.

The strong Q1 2024 performance indicates a positive trajectory, but continuous improvement in cost management and operational efficiency will be key to maintaining and enhancing this growth momentum.

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