Makers of the Dulux paint brands, Chemical and Allied Products (CAP) Plc, have come a long way since the company’s listing on the NSE in 1991. With almost 30 years in the game, the leading brand in the manufacturing and merchandising of paints has deployed a myriad of strategies throughout its growth lifecycle towards attaining its strong brand name while also keeping its head above water despite the volatile economic conditions and marginal revenue growth.
Over the past few years, the fight for survival has been even stronger, particularly following its choice to spend its entire 2018 profit after tax (PAT) of N2.03 billion on dividend payout. At the time of its announcement mid-2019, the company’s board of directors had expressed their optimism that an improved economy would yield increased returns in the year, while also assuring its shareholders that it would leverage emerging opportunities to improve performance in the current year. With hopes of an improved economy dampened, the company has set off on a course to redemption using a combination of strategies – and we’re not very sure about some of them.
Two ends of a rope
Like most companies that have been caught up in the unfavorable conditions owing to the COVID-19 pandemic, CAP plc’s Q2 2020 result was marginally worse than its Q1 results. From a 10% increase in revenue in its Q1 results (comparative to Q1’19), its Q2 results revealed a 35% decrease in revenue from N1.8 billion in Q1 2019 to N1.2 billion in Q2 2020. Its profit for the year also showed a 59% decrease from N367 million to N151 million in the same periods respectively.
Yet, those were far less noteworthy than the 92.3% decrease in selling and distribution expenses as well as its increase in trade and other receivables as at June 2020 of 121%. The company’s selling and distribution expenses significantly reduced from N127 million in Q2 2019 to N9.8 million in the quarter last-released, while its trade and other receivables had increased to N822.8 million in the period from the N371.7 million in the same 2019 period.
While, on one hand, the company appears to be strategically reducing its operating expenses as all expense items were lower, excluding administrative expenses which increased by 4.8%, the real culprit might be the restrictions in movements posed by the pandemic. With revenue curtailed, the lower expenses is great as it weeds out inefficiencies and maintains a level of profitability with the lower revenue. So, increasing its trade receivables at another stretch might not be the best support strategy for the company.
Possible causes of its increased credit
The normal reason for businesses relaxing their credit policies is that it makes it easier for the company to make more sales – or at least record more revenue in its income statement. However, in this case, the company might have had little choice. With businesses closed for 5 weeks during the quarter, CAP Plc’s clients too might have suffered from reduced Cash Flow thereby holding on to their limited cash resources.
The only way the company will have earned its revenue is by offering good credit to its regular customers. Another possibility is that given that business’ operations had been curtailed, until late May, short term credit given during the period will not have been made in Q2 but paid up in Q3. For example, with schools at home, renovations will have paused until further notice, thereby reducing demand from retailers/ wholesalers of the company’s products.
The increased credit, of course, means a reduction in the company’s actual cash generated within the period. Its statement of Cash Flow reveals a decline of 66.4% in its cash generated from operations from N550 million to N184.9 million. The implication of this, asides the fact that it casts doubt to the existing revenue figure disclosed by the company for its Q2 revenue, is that it increases the company’s chances of incurring bad debts – a situation that occurs where credit facilities extended are deemed uncollectible. This is even more so as many businesses struggle to get their feet back on the ground.
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Even as the company finds its way out of the quagmire, its share price of N15.30 is currently trading at a 52-week low which is between N15.25 and N27.50 making it a potential growth stock for long term investors who can wait the turn for the company to restart its lifecycle while also hanging on to whatever dividends they receive in the short to medium term.