Berger Paints slows down further in the third quarter

Berger Paints is not painting the right colours for profit growth this year. The company was headed for a significant drop in profit as per the second quarter growth rate. Even that weak growth record was lost in the third quarter and a sharp profit drop looks unavoidable for the paint makers this financial year.

At the end of the second quarter, we had stated that Berger Paints needed to grow sales revenue reasonably and achieve a minimum net profit of N72 million in each of the remaining two quarters of the year if it was to keep profit at the same figure posted last year. It rather moved far in the opposite direction in the third quarter.

Sales revenue declined in place of a marginal improvement in the second quarter and net profit fell by more than 40% year-on-year at the end of September. Against the N72 million benchmark required in the quarter, the company added just N2 million to the N107 million net profit reported at the end of the second quarter.

Both the revenue and profit outlooks of the company for the current year have dimmed based on the third quarter performance. 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.

Adjusted for seasonal sales in the final quarter, our earlier sales revenue projection of N2.68 billion for Berger Paints is maintained for 2014, which will be a slight decline from the turnover of N2.71 billion in 2013. The company managed to grow 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 earned in 2010.

The company has not been able to maintain a record of stable growth in revenue and profit in the past five years and the earnings instability is continuing in the current year. The paint maker‘s main challenge has been the inability to grow sales revenue, which is undermining its profit capacity. The company isn’t getting anywhere close to its 2010 revenue and profit highs.

Third quarter operations ended with an after tax profit of N109 million for Berger Paints, a drop of 29.2% year-on-year. This is a sharp slow- down in profit growth, as the company added only N2 million to the after tax profit of N107 million it posted in the second quarter. It needed not less than N72 during the quarter to keep profit at par with the N250 million it recorded at the end of 2013.

Based on the third quarter growth rate, we mark down after tax profit projection from N230 million to N151 million for Berger Paints at the end of 2014. This will be a drop of 39.6% from the full year profit figure in 2013.

The company had grown 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 been lost so far this year.

The major slow-down in profit is the result of a loss in net profit margin from 8.0% in the third quarter of last year to 6.0% this year. Profit margin is also down from 9.2% the company recorded at the end of last year. 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 recorded 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 52 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 so far is that it has an insignificant amount of borrowing, which explains the drop in interest expenses. However, increasing cash flow difficulties are gradually threatening this position. Trade and other receivables made a high jump of about 229% to N730 million in the third quarter and cash and bank balances went down by 14.3% to N479 million. At the same time, trade and other payables declined by 17.7% to N550 million. These developments led to an increased cash flow pressure on the company, resulting in a net cash decrease of N660 million during the period.

The sustaining cash flow pressure is a major signal to watch on the company. If it persists and management is compelled to resort to short-term borrowing, expect that rising finance cost could erode the already undermined profit capacity of the company entirely.

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