Chemical and paints sector: Expect different earnings pictures

Chemical and paints companies are likely to paint varying colours of revenue and profit for the 2015 financial year. Listed companies in the sector are likely to show inability to grow sales revenue in a highly competitive and saturated market in which they traded in 2015. However a few of them are promising to defend profit in the full year earnings reports expected in the next few weeks.

Listed paint makers that produce premium quality products aren’t getting the boost from the prospering real estate business, as low cost competitors continue to rule the market. Most of the fringe players are able to beat the competition with low quality products sold at comparatively cheaper prices.

The low price advantage is winning increasing customer patronage for the second and third tier operators in the business at the expense of the premium paint makers. Listed companies have therefore continued to lose market share in a market in which price matters much more than quality.

A slowdown in construction and real estate industries is adding to the constraint in sales revenue for chemical and paints operators. The companies here can therefore only count on their ability to save cost and defend profit margin. This represents the hope for either profit recovery or growth to happen for chemical and paints companies for the 2015 operations.

Berger Paints

Berger Paints shows a pattern of rise and fall in profit and the 2015 financial year is one of an upturn for the company. The company, which appears to be the life wire for the chemical/paints sector last year, is expected to rise from the lowest profit in five years in 2014 to attain the biggest profit since 2011. After tax profit already was well ahead of the closing figure in 2014 at the end of the third quarter and the paint manufacturing company is set to show a major profit advance at the end of 2015.

Revenue growth has stepped up at an increase of 18.4% in the third quarter and costs are well under control. This was reinforced by an increase of 16% in other operating income during the period. There is a gain in profit margin, which is the critical factor for the outstanding profit performance expected from the company for the 2015 operations.

Improving sales revenue and cost moderation have improved profit capacity for Berger Paints. After tax profit advanced by 89% year-on-year to N206 million in the third quarter, placing it a clear 38% above the after tax profit of about N149 million it reported at the end of 2014. Based on the third quarter growth rate, Berger Paints may come close to doubling profit from the 2015 trading.

CAP

CAP is expected to maintain a slow but stable growth in both turnover and profit for the 2015 financial year. Sales revenue slowed down to flat growth in the year and the company looks likely to see the slowest revenue improvement in many years in 2015. The only strength in earnings has come from an increase of 27% in interest earnings amounting to N159 million at the end of the third quarter.

The company’s strength lies in the ability to keep its costs within limits on a continuing basis so that each naira growth in income registers positively on profit. This explains the ability of the company to improve operating profit by 2% from less than 1% gain in sales revenue at the end of the third quarter. It also explains the ability to raise after tax profit by 4% to N1.17 billion over the same period.

The ability to defend profit margin is the critical issue for the company in 2015. At 23% in the third quarter, net profit margin is slightly improved from 22.3% in the same period in the prior year. Full year earnings prospects indicate moderate improvements in both turnover and profit for the CAP in 2015.

DN Meyer

DN Meyer is likely to show a drop in sales revenue and a loss position for the 2015 operations. It closed the third quarter operations with a decline of 9.1% in turnover at about N837 million and a lower amount of loss than it posted in the same period in the preceding year. While cost of sales moderated relative to revenue, operating expenses increased and finance costs remained relatively high as well. The company ended the 2014 operations with a loss of N36.6 million and a loss position is expected for the second year running in 2015.

Premier Paints

Premier Paints grew sales revenue by 30.5% in the full year 2014 but the strength in revenue performance was broken in 2015. The company lost about 30% of revenue at the end of the third quarter in September and posted a loss of N33 million during the same period. A drop in sales revenue and a loss position look likely for the company for the 2015 operations. It had returned to a moderate profit of N8 million in 2014 after loss of over N21 million in 2013.