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CAP Plc is running at a risk of increased bad debts

CAP plc’s Q2 2020 result was marginally worse than its Q1 results.

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CAP Plc is running at a risk of increased bad debts

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.

READ: Banks’ loans to private sector increase by N3.50 trillion in one year – CBN

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.

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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.

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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.

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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.

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Fidelity Bank Plc must cover the chink in its curtains to keep rising 

Fidelity Bank Plc follows the narrative of top tier-2 banks, which have had better or easier years.

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Fidelity Bank Plc

The Nigerian banking sector has consistently been one of the most profitable sectors in the Nigeria Stock Exchange market. However, in 2020, Deposit Money Banks (DMBs) have faced a flurry of impediments, which may have affected their solidity.

With reduced income from fee and commission implemented at the start of the year by the Central Bank of Nigeria, the paucity of foreign currency for international transactions, the resulting economic contraction from dire effects of the coronavirus pandemic, and the consequent operational constraints of keeping employees safe, 2020 is obviously fraught with numerous disorders for banking institutions.

READ: Another Fidelity Bank Non-Executive Director purchases 1 million shares worth N2.75million

For most, it hasn’t exactly been a year for growth at all, more like a walk in the woods, where improvements to bottom-line is almost unexpected. This period, many banks seem content with simply surviving and fundamentally matching their previous feats.

Fidelity Bank Plc follows the narrative of top tier-2 banks, which have had better or easier years. The bank generated a 2020 9M PAT of N20.4billion, rising 7.08% from the corresponding figures last year, but drilling solely into its results in Q3’2020 and its exact comparative period in 2019, the bank suffered reduced interest revenue, reduced fees and commission, reduced profit before tax, and reduced after-tax profit.

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READ: STANBIC IBTC posts Profit After Tax of N45.2 billion in H1 2020

Fidelity Bank Plc concluded Q3 with a profit position of N9.1billion, 13.7% decline compared to its position in 2019 y/y. PBT reduced by 12.9% from N10.8billion in 2019 to N9.4billion this year. Gross earning in Q3 was only N49billion as against N57billion in 2019 – plummeting 14%.

The Group Chief Executive Officer of the bank, Mr. Nnamdi Okonkwo, commenting on the result said: “Our 9 months results reflect our resilient business model, particularly in a very challenging operating environment. We worked closely with our customers to gradually recover from the economic impact of the pandemic and the attendant effect of the lockdown. The drop in gross earnings was due to the decline in interest and similar income, caused by lower yields and drop in fee income.”

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READ: Sterling Bank Plc records 3.28% decline in 2020 9M gross earnings

True cause of the reduction in earnings

DMBs generate gross earnings under three primary subheads: Interests earned, Fees and commission, and Other operating income. Fidelity Bank Plc generated a combined total of N150.8billion for the period ended September 2020 from these three categories, compared to the N158.5billion in the corresponding period last year.

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Deeper analysis reveals that this rising tier-2 bank has seen more deficit in revenue from fee and commission compared to the other aforementioned gross-earnings’ generating-sources within this period. Interest earned dropped by a difference of N4.3billion, while revenue from fee and commission saw a decline of N4.8billion from N14.5billion in 2019 to N19.3billion YoY.

Fee and commission as a component of gross earnings

Card maintenance fees, account maintenance fees, commission on remittances, collect fees, telex fees, electronic transfer fees, amongst others, represent the plethora of channels that makes up income from fee and commission.

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The real insight this particular component of gross earnings provides is that a spike in revenue generated indicates increasing/increased customer account activity. The more a customer maximizes the usage of an account’s product and facilities, the more the revenue earned from this segment. Thus, earnings from fees and commissions are so overriding due to their apparent controllability.

For example, a bank could make the decision to purely pursue and aggressively drive the usage of its ATM debit card and promptly see the revenue from commission rise. Furthermore, an increased rate of card production and collection necessitates usage and consequently means more money is earned as card maintenance fees.

READ: Unity Bank Plc posts gross earnings of N11.04 billion in Q3 2020

The fact that gross earnings reduced mostly from fees and commissions should be a telling concern for the Management of Fidelity Bank Plc. Post covid-19 would birth the dawn of a new era for business processes. The management must guarantee the usability of its electronic banking channels, promotion of its cards, and with urgency, implement improved service delivery mechanisms to ensure that it is the first port of call to customers for general payments and remittances.

These measures are of grave significance in the bid to bridge its widened fee and commission income gap.

READ: Central Bank says monetary policy not to blame for rising food cost

Other indices

Holistically, in the 9 months ended September, it is worthy of note that the bank made certain advancements. Customer Deposits, Net Loans and Total Assets all grew in double digits. Customer Deposits grew by 22.3% from N1.2billion to N1.5billion, Total Assets also rose by 21% from N2.1billion in 2019 to N2.5billion, and Net Loans rose by 12.9% to N1.3billion from N1.1billion.

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Airtel is paying up its debts

Airtel’s annual report revealed that the company has a repayment of $890 million due in May, as well as, an installment of $505 million due in March 2023.

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Top payday loans, Airtel is paying up its debts

Airtel’s presence in 14 countries from East Africa to Central and West Africa would have been impossible without relevant financial investments. But, while the funds have been key to its growth in the past few years, many of its financial obligations are starting to mature quickly.

The Covid-19 pandemic has had negative economic effects on different sectors of the economy; however, the resilience of the telecom sector is evident in an increase in Airtel’s income. The overall performance of Airtel increased with a revenue growth in constant currency of 19.6% in Q2 compared to 16.4% recorded in Q1, while revenue on reported basis increased by 10.7% to $1.82 billion, with Q2 revenue growth of 14.3%.


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Unilever Nigeria Plc: Change in management has had mixed impact

9 months into the change of management, Unilever Nigeria Plc’s performance in Nigeria has been largely underwhelming.

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Unilever Overseas increases stake in Unilever Nigeria Plc

Change in the management of a company is never a walk in the park. Transitions usually take time to yield the desired results. Organizations can look to past successful managerial transitions for inspiration, but not for instruction because there is no defined playbook. The decision to replace Mr Yaw Nsarkoh, who served as the Managing Director of Unilever Nigeria Plc until the end of 2019 was plausible, but adjustments were never going to be an easy task.

Mr Nsarkoh had served as Managing Director of the company for 5 years and steered the course of its proceedings with remarkable skill up until the financial performance disaster which culminated in his resignation on November 28th, 2019.


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