Revenue from Continued Operations Dips: Following the divestment of its foods business which, on average, accounts for 23.36% of its revenue, May & Baker Nigeria Plc recorded a dip of 14.22% in topline from its continued operations, with turnover settling at NGN1.87bn (vs. NGN2.18bn from beverage and pharmaceuticals in Q1:2018).
This was due to the decline in revenue from the two main business segments; revenue from the pharmaceutical unit declined by 14.38%, from NGN2.16bn to NGN1.85bn while a 10.77% drop in revenue was reported from the beverage business segment.
The firm’s poor performance mirrored the weakness in consumer demand and increased competition in the industry. However, the increase in the minimum wage, coupled with the planned expansion of its Paracetamol production line is expected to drive revenue. Hence, we project a modest growth of 8.36% in revenue.
Muted Movement in Margins: On the back of reduced production volumes, costs declined by 22.13% to NGN1.27bn, from NGN1.63bn in Q1:2018 bringing gross margin to settle slightly higher at 32.15% (vs. 31.46% in Q1:2018).
Marketing and distribution expenses moderated by 20.15% to NGN155mn, following reduced promotional efforts by management.
Administrative expenses, however, trended upwards by 13.45%, offsetting the cost savings from marketing expenses. Operating profit, therefore, contracted, as a result of reduced top-line and increased operating expenses.
Further, finance cost declined by 46.57% to NGN64mn (vs. NGN119mn in Q1:2018), on the back of the repayment of overdue loans and borrowings from the proceeds of the 2018 Rights Issue.
In 2019FY, we envisage an uptick in costs based on the buildup of several factors: an increase in sales volume of existing products and increased investment in marketing for its products. In this light, we have made a cost-to-sales projection of 63.87% and 12.21% growth in operating expenses.
Additional Ordinary Shares to Dilute EPS: For 2019FY, we have made a profit projection of NGN583mn, which implies a net margin of 6.29%, on the back of the expected improvement in top-line. We also note that the listing of 745mn additional ordinary shares will dilute the EPS in the near-term, delivering NGN0.34 in 2019FY. In view of this, our projected ROE and ROA for 2019FY came in at 10.52% and 5.91% respectively.
Outlook and Recommendation: We expect earnings to remain healthy in the near term, on the back of improved top-line from the firm’s partnerships with the Government and introduction of new products. We arrived at a target price lower than the current price due to the dilutive effects of the Rights issue conducted last year on earnings. Our target price has therefore been reviewed downwards to NGN2.16 on the back of a target P/E of 6.40x and expected EPS of NGN0.34.
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