SCOA Nigeria Plc Q2/H1 Result - Recovery underway, but revenue pressures and fragile working capital require caution

Recovery underway, but revenue pressures and fragile working capital require caution.

Catalysts

• Cost Efficiency Gains: The 38% YoY decline in distribution and administrative expenses to ₦536 million in H1 2025, alongside an 85% reduction in finance charges, has materially improved profitability. These indicate improved cost control and potential for margin expansion if revenue stabilizes.
• Improved Financing Structure: Financial charges reduced sharply from ₦351 million to ₦52 million. Combined with a marginal financial income of ₦11.6 million, this shift could signal better credit terms or loan repayments, supporting future earnings.
• Profit Rebound: The company swung from a pre-tax loss of ₦114.3 million in H1 2024 to a pre-tax profit of ₦342.8 million in H1 2025. This inflection point may mark a new earnings trajectory if sustained.

Assumptions

• Revenue Outlook: Revenue declined 24% YoY to ₦3.34 billion in H1 2025. Assuming a modest annual growth rate of 5–7% over the next five years (post-contraction recovery, macro stabilization, and improved market sentiment), revenue could reach ₦4.5–₦5.0 billion by FY 2029.
• Earnings Outlook: With the cost base reduced, and if sales recover, net margins could gradually improve to 7–9% (from current 9.8%). Profit after tax could exceed ₦450–₦500 million annually in 5 years under a stable cost-revenue balance.

Risks

• Revenue Volatility: Revenue dropped 24% YoY, suggesting demand-side weakness or supply constraints. Without a rebound in topline growth, cost efficiency alone may not drive long-term profitability.
• Working Capital Weakness: SCOA’s working capital has turned negative at -₦65 million in June 2025 (vs. ₦1.3 billion in Dec 2024), largely due to a 135% increase in current liabilities. This liquidity pressure poses a risk to operations and short-term solvency.
• Debt Pressure and Payables: Current financial liabilities more than doubled to ₦10.25 billion, possibly from new borrowings or rollovers. Trade and other payables dropped, but the large debt overhang could strain cash flow, especially if receivables (now at ₦3 billion) are slow to convert.
• Regulatory/Market Risks: Exposure to Nigeria’s volatile macroeconomic and FX environment could undermine cost gains or impair asset values. Regulatory pricing or policy shifts in the automobile and infrastructure sectors may also impact operations.

Valuation

• 3–5 Year Outlook: If management sustains cost control and returns to revenue growth, net profit margins could stabilize between 7–9%. Revenue could reach ₦4.5–₦5.0 billion by 2029. At an industry-average P/E multiple of 6–8x, earnings of ₦500 million could imply a market cap range of ₦3–₦4 billion.
• 10-Year Outlook: Assuming moderate market growth and reinvestment, SCOA could benefit from industrial infrastructure recovery. However, sustainable valuation expansion hinges on stronger balance sheet restructuring and reinvestment in revenue-generating assets.

Strengths

• Return to profitability with a PAT of ₦326 million (vs. loss of ₦116 million in H1 2024).
• Sharp drop in finance costs and admin expenses.
• Increased cash and cash equivalents (₦5.1 billion), boosting liquidity buffer.
• Equity attributable to shareholders rose by 62% to ₦3.43 billion.

Weaknesses

• Revenue contraction (-24% YoY), implying demand or operations challenges.
• Working capital position deteriorated from ₦1.3 billion to -₦65 million.
• Receivables grew more than 2.3x to ₦3.0 billion, suggesting potential collection issues.
• Non-controlling interest turned negative at -₦747 million, hinting at internal restructuring or loss absorption by minority stakeholders.

SCOA Nigeria Plc is showing early signs of financial recovery and better cost discipline. However, with revenue shrinking and liquidity tightening, investors are advised to wait for clearer signals of topline growth and balance sheet strengthening before considering a buy position.