Custodian Investment Plc is consistently profitable and ranks high on the industry scale but it has been unable to grow profit for the past three years. It shows a track record of the robust reserve, good equity standing, stable revenue and dividend payment over the past five years. However, the profit constraint still faces the company in the current financial year.
Profit has hovered around the N7 billion-mark since 2016 and the strength for breaking free from its limitations is still missing as per the interim reports so far this year. The company needs to engage the growth functions in the final quarter if it is to prevent another decline in profit at full year.
Custodian Investment is a product of a merger of Custodian and Allied Insurance Plc and Crusader (Nigeria) Plc. It is the investment holding company that houses two insurance companies and other subsidiaries in trusteeship/secretarial services and pension funds management.
The two subsidiary insurance companies are Custodian and Allied Insurance Limited – which carries on general insurance business and Custodian Life Assurance Limited – which underwrites life insurance risks. Other members of the group include Custodian Trustees Limited – which carries on the business of trusteeship and company secretarial services and CrusaderSterling Pensions Limited – which is engaged in the administration and management of pension fund assets.
The company closed third quarter operations with profit flat at N5.46 billion against a top record growth of 27 percent in revenue to over N46 billion. The third-quarter performance isn’t indicating a change from the three-year trend of profit ending flat at full year.
The company’s challenge last year was that some income lines ended negative while costs grew. The good news this year is that the income lines that closed in the negative territory last year have reversed impressively in addition to a strong acceleration in gross income.
The bad news so far is that operating cost-driven, by an upsurge of 84 per cent in claims expenses, consumed nearly all the increase in revenue at the end of the third quarter in September 2019. Rising operating cost is standing in the way of converting improved earnings into profit.
An increase of close to 48 percent in operating expenses at the end of the third quarter is more than three times the increase of 14 percent recorded at the end of 2018. At N35 billion at the end of September 2019, operating expenses had already exceeded the full-year figure of N34.3 billion in 2018.
Compared to an increase of 27.4 percent in gross earnings at the end of the third quarter, the company devoted a significantly increased proportion of earnings to operating expenses. The expenses claimed over 77 percent of revenue at the end of the third quarter against 68 percent at the end of last year. The effect of that is a drop of 13 percent in net income at the end of September 2019 compared to an increase of 22 percent at the end of the preceding year.
The company’s gross earnings consist of premium and investment income as well as fees and commissions. Led by gross premium income, gross earnings rose by 27.4 percent to N46.21 billion at the end of the third quarter. This is an accelerated growth from 16.6 percent increase recorded at the end of 2018.
An increase of 37 percent in gross premium income to N35.5 billion during the period is a top record performance in the industry. Also an increase of about 22 percent in investment income to over N7 billion is defiant of the bearish turn in the investment market.
Operating expenses are made up of claims expenses and provisions, underwriting and reinsurance expenses. An 84 percent rise in claims and provisions to over N18 billion at the end of the third quarter led the growth of 47.7 percent in operating expenses during the period.
The summary of the company’s earnings story at the end of the third quarter is that operating expenses grew far in excess of gross earnings at 48 percent compared to 27 percent. This means operating expenses consumed more than all the increase in revenue during the period. That led to a drop of 13 percent in net income to N10.5 billion during the review period.
Management’s ability to defend the bottom line against the drop in net income came from the rebound in the other income lines. A major upturn happened in respect of net fair value gains – which advanced from a net loss of N1.1 billion in the same period in 2018 to a net gain of N1.25 billion at the end of the third quarter.
Net realised gains also reversed from a loss of N50 million to N141 million gain over the same period. These favourable developments enabled the company to absorb an increase of 19 percent in management expenses and still permitted some improvement in profit.
Custodian Investment closed third quarter operations with an after tax profit of N5.46 billion, which is a year-on-year increase of 6 percent. This is against a decline of 3 percent in after tax profit at the end of 2018.
The company earned 89 kobo per share at the end of the third quarter, up from 84 kobo in the same period last year. It closed the 2018 operations with earnings per share of N1.16.
Despite the inability to grow profit, Custodian Investment improved total cash dividend [interim and final] from 42 kobo per share in 2017 to 45 kobo per share at the end of 2018. It has capacity good enough to raise dividend further at the end of this year. It paid an interim cash dividend of 10 kobo per share last September for the 2019 financial year.
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