Marginal Decline in Revenue: Berger Paints Plc (BERGER) started the year on a weak
note as its Q1:2019 revenue declined marginally by 1.08% YoY to NGN797.62mn (vs.
NGN806.33mn in Q1:2018) and by 13.66% QoQ.

The marginal reduction was the effect of 3.03% decline in sales of paints and allied products to NGN781.94mn. Although it made additional NGN15.68mn in contract services, specifically, supply and apply services contract, the contribution to total revenue is paltry at 2.01%.

We believe that higher infrastructural spending, further deepening of the real estate
sector, and the recent change in the company’s management team (with respect to the Managing Director and Chief Operating Officer) will help position BERGER on the path to achieve modest revenue growth in 2019. We forecasted revenue growth of 6.5% to NGN3.59bn for the year.

Larger Decline in Production Cost Delivers Better Margins: Decline in cost of sale by
9.78% YoY to NGN416.63mn led to improvement in the gross margin from 42.73%
(NGN344.55mn) in Q1:2018 to 47.73% (NGN380.99mn) in Q1:2019. Although
operating expenses (OPEX) was 4.34% higher as personnel (NGN129.53mn) and
corporate (NGN14.53mn) expenses increased by 13.36% and 39.32% respectively,
operating margin remained solid at 15.19%, greater than 12.22% reported in the
corresponding period of 2018.  Pre-tax and after-tax profit settled at NGN124.17mn and NGN84.43mn apiece with margins of 15.57% and 10.59% respectively.

We believe the lower cost-to-sales ratio is sustainable through the year, owing to the
positive outlook on FX stability, which will support the company’s cost management
for the purchase of raw materials. Hence, we project a cost-to-sales ratio of 53%, while
we forecast OPEX/sales ratio of 34%. Based on our expectation of revenue and cost,
we expect 2019FY profit to grow by 6.13% to NGN340.15mn, implying a net margin of

More Working Capital Tied in Inventory and Receivables: BERGER’s total asset grew
moderately by 1.89% to NGN4.62bn (vs. NGN4.54bn as at 2018FY). The growth was
largely driven by investment in inventories and receivables, which increased by
13.82% (+NGN83.83mn) and 27.17% (+NGN51.89) respectively.

Meanwhile, BERGER maintained a stable current ratio of 1.28x, although the cash
ratio fell from 0.40x to 0.24x. Also, net operating cashflow was negative as a direct
consequence of more working capital tied up in inventory and receivables.

Recommendation: We forecast EPS of NGN1.17 (vs. NGN1.11 in 2018FY) for 2019FY.
Based on a likely mean reversion tendency, we project BERGER closing the year at a
P/E multiple of 7.5x, which combined with our EPS expectation, gives a revised target
price of NGN8.78, down from the previous target of NGN9.45. This represents an upside
of 19.39% based on the closing price of NGN7.35 on May 10, 2019, we therefore rate
the stock a BUY.

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