Berger Paints heads for big profit recovery

Berger Paints closed last year with the lowest profit in five years. This year, the paint manufacturing company looks very likely to post the biggest profit since 2011. The company has not been able to maintain a stable record of earnings performance. Over the past five years, profit has fallen three times and grew only once. This year is one of an upbeat for the company with after tax profit already well ahead of the closing figure last year at the end of the third quarter. The company could double its profit if it maintains the current growth rate to full year.  

Revenue growth is usually the main constraining factor for the company but costs are well under control. An impressive growth of 18.4% in sales revenue was recorded in the third quarter though the full year projection indicates a slowdown in the final quarter. There is a gain in profit margin, which is the critical factor for the outstanding profit performance expected from the company at the end of the year.

Turnover grew by 18.4% to N2.15 billion year-on-year at the end of September, showing an accelerated growth during the quarter. This was reinforced by an increase of 16% in other operating income during the period. Investment income however dropped by 42.2%. Sales revenue is projected at N3.2 billion for Berger Paints at the end of 2015, which will be a moderate increase of about 4% from the turnover of N3.08 billion in 2014. The company grew sales revenue by 13.6% last year to move above the peak revenue figure of N2.76 billion it generated in 2010.

The company is making up for the inability to grow sales revenue with cost moderation this year, which has improved its profit capacity. It closed third quarter operations with an after tax profit of N206 million, which is a rise of 89% year-on-year. This is a big leap in profit performance, as it is already 38% above the after tax profit of about N149 million it reported at full year in 2014. Based on the third quarter growth rate, after tax profit is projected at N292 million for Berger Paints at the end of 2015. This will be a major advance of about 96% above the full year profit in 2014.

The company’s profit dropped by 40.4% in 2014 after increasing by 39% in 2013. Net profit dropped in 2011 and 2012 from the company’s peak record of about N440 million in 2010. In the rise and fall pattern of profit performance, this is a year of an upturn for Berger Paints.

Cost moderation is providing the strength for the improved profit capacity in the year. Cost of sales was flat at an increase of 1.7% against the increase of 18.4% in sales revenue. Cost of sales claimed a reduced share of sales revenue at 48.5% at the end of the third quarter compared with 56.4% in the same period last year. Gross profit margin therefore improved and permitted an increase of 39.8% in gross profit to N1.10 billion during the review period. Other cost moderations came from administrative expenses, which grew by only 3.1% and finance cost, which declined slightly. Selling/distribution expenses however rose unexpectedly by 163% to dilute the impact of the cost savings on the bottom line.

The cost savings were achieved on the major expense lines of the company, which lifted profit margin from 6% in the third quarter of last year to 9.6% this year. Profit margin is also twice the 4.8% the company recorded at the end of last year. Administrative cost was responsible for the loss of profit margin in 2014, but this year it has become a cost saving area.

The company earned 71 kobo per share at the end of the third quarter, rising from 38 kobo in the same period last year. It is expected to earn N1.0 kobo per share at full year, an anticipated rise from 51 kobo it earned in the 2014 full year.

A major operating advantage for the company is that it has an insignificant amount of balance sheet debts, which explains the flat growth in interest expenses. It has only short-term borrowings of N135 million, which is a slight increase from N132 million at the end of last year.

The company’s cash flow position has improved significantly with a shift from a net cash utilisation in operating activities to a net cash generation of N421 million at the end of the third quarter. It ended the period with a net cash increase of N121 million against a net cash decrease of N716 million in 2014.