NICOL’s 2023 financial story: Balancing stability, growth and diversification

NICOL, a closed-end fund listed on the Dar es Salaam Stock Exchange (DSE), demonstrated impressive financial results for 2023, underscoring the effectiveness of its investment strategy and strong market performance.

The company’s total revenue increased by 33.4 per cent, rising from 8.34bn/- in 2022 to 11.12bn/- in 2023, driven primarily by a well-diversified stream of investment income.

The mix of dividend and interest income played a crucial role in this growth, with dividends contributing 55 per cent of total investment income and interest income accounting for 45 per cent.

This balance has been instrumental in maintaining NICOL’s financial stability, allowing it to navigate market volatility while remaining positioned for long-term growth.

NICOL’s income was further bolstered by a sharp rise in other income, which surged to 1.27bn/- in 2023, up from 218m/- in the previous year.

This increase stemmed largely from two key factors: a significant rise in miscellaneous income, which jumped from 37.79m/- to 657.61m/- and a reversal of provisions amounting to 608.24m/-.

The gains from miscellaneous income likely originated from non-core activities such as asset disposals, while the reversal of provisions indicated a reduction in previously anticipated liabilities.

Although these factors provided a temporary boost to profitability, they represent one-off gains and should not be relied upon as recurring sources of income.

Operationally, NICOL’s management focused on enhancing efficiency, leading to a 30 per cent reduction in administrative expenses.

This cost-saving initiative, potentially the result of targeted expense management or economies of scale as the company’s asset base expanded, reflects NICOL’s ongoing efforts to optimise its operations.

Nevertheless, this improvement in cost management was partially offset by a sharp increase in finance costs, which rose from 87.7m/- in 2022 to 2.4bn/- in 2023.

This spike was due to the company’s debt-financing activities over the past two years.

In 2022, NICOL raised 21.6bn/- in borrowings from Diamond Trust Bank (DTB) at an interest rate of 11.5 per cent for a 7-year term, secured by Treasury Bonds.

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In 2023, NICOL took an additional 1.1bn/- loan from DTB, at the same interest rate for a 3-year term, to fund investments in its subsidiaries.

The resulting increase in finance costs highlights the challenge of ensuring that these borrowed funds generate returns sufficient to offset the higher debt service burden.

Despite the rise in financing costs, NICOL’s overall profitability remained strong. Profit before tax grew by 23.2 per cent to reach 7.63bn/-, while profit after tax saw a 14.6 per cent increase.

NICOL’s financial position continued to strengthen, supported by robust asset growth.

Non-current assets rose by 46 per cent, driven by a surge in equity investments, which increased from 66.46bn/- in 2022 to 96.88bn/-in 2023.

However, the company’s equity portfolio remains highly concentrated, with NMB Bank accounting for 94.74 per cent of its total equity investments.

This significant concentration poses a potential risk should NMB’s performance falter in the future.

Other holdings, which include the DSE (2.39 per cent), Tanzania Breweries Limited (1.44 per cent), Vodacom (0.79 per cent), Twiga Cement (0.27 per cent), CRDB Bank (0.14 per cent), Tanzania Cigarette Company (0.13 per cent), Tanga Cement (0.09 per cent) and Swissport (0.005 per cent), represent only minor positions.

While these holdings contribute to some degree of diversification, they remain relatively small compared to NICOL’s dominant stake in NMB. NICOL’s fixed-income portfolio also performed well, ensuring a stable stream of interest income.

Government securities remained steady at 34.64bn/-, favouring long-duration assets, with 71 per cent invested in 20-year Treasury Bonds and 29 per cent in 25-year Treasury Bonds.

This strategy reflects NICOL’s focus on capturing higher yields through long-term investments. In terms of real estate, NICOL made significant strides by reactivating its subsidiary, NICOLAND and acquiring Mirambo Street Properties Ltd (MSP).

For the first half of 2024, MSP generated 735.40m/- in rental income and recorded a profit before tax of 635.38m/-, driven by a 95 per cent occupancy rate.

These ventures are part of NICOL’s strategic expansion into real estate, aimed at diversifying its income streams and reducing reliance on traditional equity and fixed-income investments.

NICOL’s stock performance has mirrored its strong financial results.

The stock price rose steadily, from 175/- in 2019 to 800/- by mid-2024, reflecting a 60 per cent year-todate gain from the end of 2023, when the price was 500/-.

Over a five-year period, NICOL’s stock achieved a Compound Annual Growth Rate (CAGR) of 35.52 per cent, highlighting sustained investor confidence and market interest.

The company’s market capitalisation reached 46.23bn/-, supported by a 28 per cent increase in average daily trading volume, indicating greater liquidity and investor participation.

NICOL has also demonstrated a strong commitment to shareholder returns through consistent dividend growth. Dividends have risen from 10/- per share in 2020 to 53/- in 2023.

Despite these increases, the dividend yield declined from 12.33 per cent in 2021 to 10.60 per cent in 2023, primarily due to a significant rise in the stock price.

With a payout ratio ranging between 45 per cent and 59 per cent from 2020 to 2023, NICOL has opted for a more conservative dividend strategy compared to other closed end funds, which typically distribute 80 per cent to 100 per cent of their income.

This strategy balances shareholder returns with the need for reinvestment, ensuring both immediate rewards and long-term capital appreciation. NICOL’s strong 2023 performance positions it well for future growth, but several challenges remain.

Rising finance costs from recent borrowings could weigh on profitability if the borrowed funds do not generate sufficient returns.

Effective cash flow management and successful investment in high return ventures, particularly in real estate, will be crucial to maintaining profitability.

NICOL’s reliance on NMB, which constitutes the bulk of its equity investments, presents a concentration risk.

To address this, the company should explore opportunities to diversify its portfolio, either by increasing exposure to companies with strong growth prospects and reliable dividend payouts or by expanding into regional markets.

NICOL’s foray into real estate, through subsidiaries like NICOLAND and MSP, offers significant growth potential but also brings new risks, such as inefficient property management, market liquidity challenges and potential cost overruns in ongoing developments.

Effective management of these factors will be essential to unlocking the full potential of these investments and ensuring they contribute meaningfully to long-term growth.

Currently, NICOL is trading at a significant discount, with its market price of 750/- per share well below its Net Asset Value (NAV) of 2,247/- per share, indicating an undervaluation of around 66.6 per cent.

The company’s Return on Equity (RoE), at 4.89 per cent, suggests room for improvement in terms of maximising equity returns.

To enhance RoE, NICOL should consider reallocating its portfolio toward higher-return investments and reducing its dependence on NMB.

By focusing on sectors and regions with strong growth potential, NICOL can capture greater capital appreciation while mitigating concentration risk.