Can Fidson Healthcare sustain another strong first quarter starting?

Fidson Healthcare has begun the current financial year on a sound profit footing but the company’s ability to maintain the strong growth momentum is in doubt. The pharmaceuticals company usually makes a very good impression on profit performance in the first quarter, which fizzles out at full year. A final quarter shock treatment of investors has been the pattern for the company’s full year earnings figures in recent years.

The company’s Managing Director/Chief Executive Officer, Dr. Fidelis Akhagboso Ayebae, opened trading on a big note last year as if exceptional profit growth was going to happen but closed it with a disappointing drop of 26.2% in net profit. He showed investors a net profit of N194 million in the first quarter of last year, grew it to about N380 million in the third quarter and slashed it to N155 million at full year. Profit growth also slowed down considerably in the course of 2012 operations from N121 million in the first quarter to N210 million at full year.

At the end of the first quarter of the current year, the company reported an after tax profit of N203 million, which is already well above the full year profit for 2013. It is however just 4.8% ahead of the corresponding first quarter profit figure in the prior year. This underscores the uneven growth pattern of the company on the profit track.

Full year profit projection based on the first quarter growth rate will therefore be misleading. The chance is high that the company will repeat the earnings pattern of the preceding years where the impressive profit record seen in the first quarter slows down, even drops at full year. We project a net profit of N204 million for Fidson Healthcare at the end of 2014 based on its full year net profit margin of about 2.0% in 2013.

Profit slow down at the end of the year happens due to loss of profit margin. The full year profit margins in the past two years are therefore better indications of the company’s profit outlook for the year. Profit prospects for the company need to be closely monitored, as the actual figures are subject to wide fluctuations. Subject to an unexpected change in trend, the first quarter profit growth momentum isn’t likely to be sustained to full year.

The company shows a comparatively stable record of revenue performance, having maintained a continuing growth in sales revenue in the past five years. It closed the first quarter with a turnover of about N2.7 billion, a marginal improvement of 3.1% over the corresponding figure last year.

Full year turnover is projected at N10.2 billion for Fidson Healthcare in 2014. This will be an improvement of 10.3% over the sales revenue figure the company posted in 2013. It will however be a slowdown from the revenue growth of 29% the company achieved in the preceding year. It had earned sales revenue of N9.25 billion in the 2013 financial year.

The company defended profit margin at 7.5% in the first quarter with cost moderations marginally exceeding the increases during the review period. A major favourable cost behaviour was a decline of 8.0% in distribution/administrative expenses at N1.06 billion year-on-year. This was however countered by the virtual tripling of interest expenses at 196% to over N148 million.

The increase is interest expenses follows a growth of 28% in current financial liabilities to N1.78 billion over the closing figure in 2013. Long-term financial obligations however declined by 12% to N2.27 billion during the same period.

Other major changes in the company’s balance sheet within the first three months of the year include a drop of 71% in cash and bank balances to N40.4 million, a drop of 34% in inventories to N991 million and a rise of 43% in trade debtors and other receivables to N3.36 billion. There was also a drop of 28% in non-current assets held to maturity to N256 million. There was a marginal decline in trade and other receivables at N1.64 billion during the period.

The changes in the balance sheet resulted in cash flow difficulties for the company during the first quarter. Net cash generated from operating activities dropped by 76% to N426 million but this was significantly countered by a net cash generation of N34 million from investing activities against a cash utilisation of N1.8 billion over the period. Net cash used in financing activities rose by 128% to N410 million, resulting in a net cash increase of over N50 million. This only reduced the opening cash deficit of over N471 million slightly.

The company earned 14 kobo per share at the end of the first quarter against 13 kobo in the first quarter of last year. Earnings per share is expected to be 15 kobo for the company at full year based on the projected full year net profit. It earned 10 kobo per share at the end of 2013 and has proposed to pay it all out to shareholders in cash dividend.