Berger Paints 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 is inability to grow sales revenue, which is undermining its profit capacity. Mr. Tor Nygard, a Norwegian electrical Engineer, who heads the company, has not been able to match the 2010 revenue and profit highs over the past three years. He isn’t likely to do so even in the current year with likely declines in turnover and profit.
The company ended its second quarter operations with sales revenue of about N1.23 billion. This is an increase of only 1.2% over the corresponding figure in the preceding year. It is however a step up in the growth rate from the turnover figure of about N590 million the company reported in the first quarter.
The full year revenue outlook of the company has therefore improved with projected sales revenue of N2.68 billion. This is still indicating a slight decline from the turnover of N2.71 billion the company recorded at the end of 2013.
Revenue performance has been weak for Berger Paints in the past five years, which reflects fierce competition in the marketplace. The company managed to grow sales revenue by about 8.0% last year after two years of declining sales. Sales revenue has therefore remained below the N2.76 billion the company earned in 2010.
Profit performance has followed the trend in sales revenue. A year-on-year improvement of about 6.0% to N107 million was recorded in after tax profit in the second quarter. Based on the second quarter growth rate, full year net profit is projected at N230 million for Berger Paints at the end of 2014. That will mean a decline from the profit figure of about N250 million the company reported in 2013.
Berger Paints 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 move made in 2013 now looks unsustainable in the current year. Earnings growth may step up further in the second half of the year, which could improve the full year profit outlook.
Profit margin improved slightly from 8.3% in the second quarter of last year to 8.7% this year. This is also better than the 8.1% recorded in the first quarter. Profit margin however is down from the 9.2% level at the end of 2013. Profit margin is in no way near the five-year peak record of 16% achieved in 2010.
The slight gain in profit margin in the second quarter was made possible by a decline in cost of sales against the marginal improvement in sales revenue. Cost of products sold declined by 9.3% to N675 million against the corresponding figure in 2013. The decline enabled an increase of 17.6% in gross profit during the same period. Gross profit margin grew from 38.7% in June last year to 45% this year.
Another favourable cost behaviour came from selling and distribution expenses, which declined by 10.7% to N67 million. An improvement of 13% in other operating income also helped the bottom line during the review period.
Administrative expenses however rose well ahead of revenue at 18% to N413 million and claimed much of the cost savings made. The same applies to finance cost, which multiplied from N3.4 million to N14 million over the period. A fall of 27.2% in investment income to N38.6 million reinforced the pressure on the company’s earnings during the period.
Earnings per share declined from 46 kobo to 37 kobo during the review period due to an increase in the volume of shares. Based on the forecast profit for the year, earnings per share is expected to stand in the region of 79 kobo for Berger Paints at the end of 2014. Earnings per share is therefore expected to close below the N1.14 the company recorded in 2013.
Major changes in the balance sheet from the end of last year’s position include a drop of 16.9% in inventories to N500 million and a rise of over 250% in trade and other receivables to N836 million. Cash and bank balances have risen by 26.6% to N642 million and trade and other payables have dropped by 31.5% to N471 million. Issued share capital has risen by 33% to about N145 million and share premium has advanced by close to 300% to N635 million. Equity base is up by 51.5% to N2.55 billion within the first six months of the year.
The company is facing a cash flow constraint this year with the heavy build-up of trade and other receivables. A net cash of N456 million was used in operating activities against a net cash generation of N3.0 million in the preceding year. This has forced the company’s management to cut down on investing and financing activities considerably in the current year. Despite that, the company recorded a net cash decrease of a little below N500 million at the end of June.
For Nygard to prevent a profit decline this year, he needs to step up earnings growth in the second half of the year. He will have to generate a net profit of about N72 million in each of the remaining two quarters of the year. In order to accomplish this, he will need to step up sales revenue growth or improve profit margin further or both.
