How does it feel owning a company that supplies a very essential product to Nigerian Bottling Company, Nigerian Breweries, Consolidated Breweries and even Guinness. It sounds like a stock you would like to own isn’t it? In fact if you had bought this stock back in December when we added it to our watch list you probably would have gained like 25% today. If you had decided not to hold on and sell earlier on in February when the share price hit N21 you probably would have gained about 52%. [upme_private]
That company like you may have guessed is Beta Glass Nigeria Plc. It is a stock that have been on my watch list for months now but I haven’t just had the impetus to turn it into a buy. The reasons are somewhat contradictory depending on how you adjudge my reasons. But first their latest results;
2014 H1 Result
Beta Glass released its half year result posting an essentially year on year flat pre-tax profits growth. Pretax profits was N1.2billion same as half year 2013. Revenue was N7.9billion and an 18% growth from the N6.7billion posted a year earlier. Looking at the result from this stand point is a bit unflattering as you miss out the important factors inherent in it. For starters, on a quarter on quarter basis this quarter April to June 2014 was perhaps their best yet in the last 6 quarters in terms of pre-tax profits. They posted N735million this quarter a marked improvement from N460million in Q1. They have also seen margins improve quarter on quarter (even though it dropped year on year) and paid down some debts.
The Opportunity
The upswing in revenue and profitability points to an increasing demand in the company’s production driven by demand from its major customers. The parent company Frigoglass also point out this fact in their half year annual report reporting that their “Nigerian glass business was aided by solid demand from brewers and follows new product launches in the market”. A look at what is going on in the beer market is a pointer to this already. Guinness, Nigerian Breweries, Consolidated Breweries are all launching new products and driving up their volumes. It then suggests the growth in the brewery and beverage industry is positively correlated with the success of Beta Glass. Frigoglass went on to affirm their belief that “Nigeria’s beer market fundamentals remain strong, driving some international brewers to expand capacity in order to capitalise on this growing demand. The increased demand for glass also resulted in higher year-on-year sales for our plastic crates business, reflecting key customers’ promotional campaigns”. Sounds good but their elation is probably because the Parent company’s Glass business has been going facing tough times lately posting a loss for the period ended June 2014.
Valuation
This is where it gets really cheeky. Beta Glass currently trades for N17 even thought my valuation based on its 5 year future earnings per share discounted to today gives it a price of about N40. How is this possible? One quick measure is to look at the Net Assets per share. Beta Glass currently trades at about 60% of its Book Value per share. It has a working capital of N8.8billion with about N2billion in the bank (as at June 30th).
But it will be fool hardy to value a stock this way only. The Nigerian stock market relies so much on dividend for its valuation and based on that Beta Glass is probably worth a shocking N8. It paid 38kobo dividends for the year ended December 2013 which is a yield of just 2.2%!!! One would at least expect a yield of about 5% for a company like that and if you apply a yield of 5% on a dividend of 38 kobo you get a price of about N8. The low dividend obviously has nothing to do with its profitability or ability to pay. It’s all about the company’s dividend policy. It has paid about 12-13% of profits as dividend in the last 4 years. A very small pay out ratio if you as me. It also could be due to a lock in policy tied to some debt payment. Typically some debts restricts dividend payout ratios.
So, Imagine if they decide to increase their payout ratio to 55% of last years profits. That will be about N1.6 and at today’s price that will be a 9% dividend yield. At 4% dividend yield the price would probably rise to N40. Is that conceivable? Well, if the market is willing to accept 2.2% dividend yield as it currently is doing, a 4% yield isn’t far-fetched is it? Now this is no prediction, my assumptions is simply that the share price is currently undervalued and I think it is because of its dividend policy which by all counts can change. If they decide to triple its dividend (which it can) its share price should double.
Finally
Yes finally, I still believe the stock is undervalued based on its fundamentals. However, you always want to own a stock for two reasons. Its ability for the stock to pay dividends and post a steady capital appreciation. The fact that they are both inter woven suggest anything can happen. With a bump in dividend by year-end the share price should rise considerably and without it may just wan further down again. What more the volume of trade for the stock is quite low increasing your risk of exiting should you want to. Despite all this, the fundamentals still look sound and I am confident an investment in the stock may pay off much later if it is not sooner (with one eye on what their parent company is doing in Europe).
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