• The company share price is currently 52kobo and has returned a negative 9% return this year
• The company is a technology solutions company and has state governments as its major clients
• The company posted a profit of N308million last year (3% growth year on year). It has a compounded annual profitability growth rate of 11%
• It posted a pre-tax profit of N257million the first half of this year representing a 31.6% rise over the same period last year.
• It’s current P.E ratio is 7x and has a PEG ratio based on its CAGR of 0.56
• It paid a dividend of 2kobo last year resulting in a gross dividend yield of just 2.6% just before the marked down date.
• It’s dividend payout ratio was 23% compared to 50% the year before
• The company directors own about 71% of the company essentially remaining unchanged from 2012.

A few months ago one of my ardent readers called me up to ask for a stock pick. As we discussed further he informed me that he had taken a bad bet on a bank stock that refused to rise for months remaining stuck at the same price even as I write. He bought the stock at 50kobo per share believing that stocks bought at 50kobo is a safe bet and could go nowhere else except up. Though he was right in a way, he forgot that apart from remaining stagnant in terms of share price, he could actually get no bidders for the stock and even when he did get they would bid far less than 50kobo.

I have always learnt to beware of 50kobo stocks because of the simple misconception of thinking they were cheap and have basically eliminated all risk. However, there are a few exceptions to this rule. A stock trading at 50kobo or 52kobo even when it is probably worth much more is a different kettle of fish. The metrics is surely different and you should look at it from multiple perspectives.

Courteville Business Solutions has been one stock in my portfolio for over a year and has mostly under performed. Since I bought the stock it never did rise above 80kobo at the most. So what is wrong with this stock? I have a few theories

Dividends – The company paid dividends of 2kobo per share this year which was at the time a gross dividend yield of about 2.5%. For a small cap company that is  very very poor considering that giants like Zenith Bank could boast of 7 to 8% dividend yields. The market wasn’t going to buy that and so punished the stock after it paid dividends

But why that low dividend yield? I believe the company’s low dividend was because the company has very little cash. They had about N97million  at the end of the financial year 2013 and N30million at the end of the first quarter of 2014. The company is basically cash strapped which takes me to the next issue

Why are they cash strapped? Courteville generates about N350million in net operating cash flow going by the 2013 and 2012 results. However, it has invested most of the money in capex having spent over N700million between 2012 and June 2014. Therefore, it is basically investing most of its cash in investing for the future as they seek to conquer more states and expand their auto-reg platforms. This is starving the company of hard earned cash that can be used to repay shareholders.

Trade debtors – Because the company deals with state governments, most of which have very little IGR capabilities in the short term, it is chronically owed by states. It had trade debtors of about N634million from states using its Auto-reg platforms. These debts are crunching and if not contained can ruin the company.

Reliance on State Governments – Courteville has to start thinking about diversifying its customer base and looking more into other business that can use its platform. I like b2b (business to business) companies that have products other business love to use. Surely there has to be a market for their business and I hope that is also what all the capex being spent is for. Its e-commerce website, Egole,  contributes about 10% (or less) of the company’s turnover and hasn’t quite performed well this year. It is also relatively unpopular compared to the likes of Jumia.

Competition – Whilst its autoreg business model looks good, I do not believe they have a strong competitive edge especially in a dynamic industry like technology. Another smaller more nibble company can with good contacts develop a software that will drive them out of business. However, this is purely a risk and with sound business development they should have covered enough grounds to insulate shareholders for some years.

For the reason above, you wonder if 50kobo is indeed the right price for this stock. I did another valuation of the stock and quite believe the stock is worth about N1.50 on a long term basis.

Therefore,  I sort of feel it is undervalued. You could argue that return on equity is not robust enough to justify the low price to book ratios or that the earnings growth is too slow to back up a case for  low PEG ratio, however, it doesn’t negate the fact that they have been profitable and have a large potential market to weigh in on.

Another major driver could also be dividend payouts. The last time Courteville had such a boost in price was in 2012 when it offered a bonus issue of 1 for 5 and 5kobo dividend respectively taking the share price to as high as 89kobo (its highest ever). Whilst I don’t see that happening this year, I do feel dividend payout could be as high as 40% (23% in 2013). I project an earnings per share of about 10 kobo for 2014 giving us a dividend of 4kobo per share and a yield based on the current price of 8%.

If you also consider that the directors own a huge chunk of this business there appears to be a mutual benefit to run the business well and increase shareholder value.

Buy, Sell or hold? – My opinion is to buy for a short-term outlook of 6 months as I believe the share price should rise to about 75kobo within this period. That will be a 44% upside based on current price. The last time it paid dividend (this year) its share price was 77kobo and that was for a paltry dividend of 2kobo per share.

However, the future does look uncertain on a long term and don’t intend to keep my holdings beyond May next year based on the current information I have. But if you are a firm believe in the potential of 50kobo stock to go nowhere else but up, then this is one stock that could do just that will a much mitigated risk than others.[/upme_private]