Berger Paints heads for lowest profit in years

Berger Paints traded on low momentum for the three quarters of the year and the full year outlook indicates a sharp drop to the lowest profit in many years for the paint makers. A sharp slowdown in earnings in the third quarter has weakened the initial performance expectations of the company in 2014.  

In place of a marginal improvement in the second quarter, sales revenue declined in the third and net profit fell by more than 29% year-on-year. The company added just N2 million to the N107 million net profit posted at the end of the second quarter. The revenue and profit prospects of the company for the current year have dimmed due to the third quarter drop.

Turnover declined by 5.4% to about N1.82 billion year-on-year at the end of September against a marginal improvement of 1.2% recorded in the second quarter. This was reinforced by a drop of 26% in investment income during the same period. Sales revenue is projected at N2.58 billion for Berger Paints at the end of 2014, which will be a decline of about 5% from the turnover of N2.71 billion in 2013. The company grew sales revenue by about 8.0% last year after two years of declining sales. Sales revenue has remained below the N2.76 billion the company generated in 2010.

The company has not been able to maintain a stable record of revenue and profit performance in the past five years and the earnings instability is continuing in the current year. Its main problem is the inability to grow sales revenue, which is undermining profit capacity. The company isn’t getting anywhere close to the revenue and profit highs attained in 2010.

It closed third quarter operations with an after tax profit of N109 million, which is a drop of 29.2% year-on-year. This is a major slowdown in profit performance, as only N2 million was added to the after tax profit of N107 million it reported in the second quarter. Based on the third quarter growth rate, after tax profit is projected at N141 million for Berger Paints at the end of 2014. This will be a drop of nearly 44% from the full year profit of N250 million in 2013.

The company grew after tax profit by about 39% in 2013 after a two-year profit fall. Profit went down in 2011 from the company’s peak record of about N440 million in 2010 and further to N180 million in 2012. The recovery momentum gained in 2013 has again been lost in 2014, thus sustaining the company’s random walk earnings pattern.

The sharp slowdown in profit in the third quarter is the result of a loss in net profit margin from 8.0% in the third quarter of last year to 6.0% last year. Profit margin is also down from 9.2% at the end of 2013. One major cost item is responsible for the loss of profit margin during the review period. This is administrative cost, which rose by almost 33% to N685 million against the decline in sales revenue.

Cost of sales declined ahead of sales revenue at 13.2% and moderated the impact of administrative expenses on the bottom line. This accounted for an improvement of 7.2% in gross profit to N793 million. Other favourable developments include a decline of 7.0% in selling/distribution expenses, a rise of close to 92% in other operating income and a decline of 12.5% in finance cost.

The company earned 38 kobo per share at the end of the third quarter, down from 71 kobo in the same period last year and inching up from 37 kobo at the end of the second quarter. It is expected to earn 48 kobo per share at full year, an anticipated drop from 86 kobo realised in the 2013 full year.

A major operating advantage for the company is that it has an insignificant amount of balance sheet debts, which explains the drop in interest expenses in the third quarter. However, increasing cash flow difficulties are gradually threatening that position. Trade and other receivables made soared by 229% to N730 million in the third quarter and cash and bank balances dropped by 14.3% to N479 million. At the same time, trade and other payables went down by 17.7% to N550 million. These developments resulted in a net cash decrease of N660 million during the period.

The sustaining cash flow pressure is a major signal to watch on Berger Paints. If it persists and management is compelled to resort to short-term borrowing, rising finance cost could undermine further the company’s profit capacity.