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Blurb

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.

READ: Biggest oil trader, Vitol, in record compensation, pays over $6 million each to top employees

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.

READ: Julius Berger’s rebound contingent on full economic bounce back

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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Blurb

GSK in big trouble as losses mount

The results were less than impressive with several key indicators showing a year-on-year decline.

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GSK Consumer Nigeria Plc records 3.34% increase in 2020 9M revenues.

GlaxoSmithKline Consumer Nigeria Plc (“GSK Plc” or “the Company”) is a public limited liability company with 46.4% of the shares of the Company held by Setfirst Limited and Smithkline Beecham Limited (both incorporated in the United Kingdom), and 53.6% held by Nigerian shareholders.

The ultimate parent and controlling party is GlaxoSmithKline Plc, United Kingdom (GSK Plc UK). The parent company controls GSK Plc through Setfirst Limited and SmithKline Beecham Limited.

The Company recently published its unaudited first quarter (Q1) 2021 consolidated financial statements for the period ended 31 March 2021.

READ: GSK Consumer Nigeria Plc records 3.34% increase in 2020 9M revenues

The results were less than impressive with several key indicators showing a year-on-year decline. For example, Group revenue (turnover) declined from ₦4.99 billion in Q1 2020 to ₦3.46 billion in Q1 2021 a drop of over 30.66%. The revenue drop was due to a sharp decline in the local sale of its healthcare products.

Total loss after tax as of Q1 2021 was ₦238.07 million compared to a profit after tax of ₦113.47 million for the same period to Q1 2020.

The company is essentially divided into two segments viz: Consumer Healthcare and Pharmaceuticals. While the Healthcare segment was largely profitable in Q1 2021 (making a profit before tax of ₦ 8.73 million by March 31, 2021, the pharmaceuticals segment made a loss of ₦262.93 million in the same period.

READ: GlaxoSmithKline Nigeria announces changes in its board

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The Consumer Healthcare segment of the company consists of oral health products, digestive health products, respiratory health products, pain relievers, over the counter medicines, and nutritional healthcare; while the pharmaceutical segment consists of antibacterial medicines, vaccines, and prescription drugs. While goods for the consumer healthcare segment are produced in the country, the pharmaceuticals are all imported.

The largely imported pharmaceutical products are thus exposed to the vagaries of foreign currency fluctuations coupled with a negligible to no revenue from the foreign sale of its healthcare products (same as in Q1 2020) as it barely exports its products out of the country.

The cost of importing the antibacterial, vaccines and prescription drugs, and the significant local operating expenses wiped off the marginal gross profits made by the pharmaceutical segment of the company. In effect, the gross profit of ₦508.12 million made by the pharmaceutical segment of the company was eliminated by an operating expense of ₦735.7 million and this resulted in a net loss for the pharmaceutical segment of the business.

READ: Nigerian Breweries posts N7.66bn as Q1 2021 profit, shares gain 2.2%

Apart from the impact of imported pharmaceutical products as already discussed, other issues that affected the company’s Q1 2021 results and are likely to continue to affect its performance in future include:

  1. A limited product mix that has only the likes of Macleans and Sensodyne (Oral Healthcare); Pain relievers (Panadol and Voltaren); Digestive Health (Andrews Liver Salt); and Respiratory Health (Otrivin and Panadol Cold and Catarrh) all within the Consumer Healthcare segment.
  2. Increased competition, particularly from local pharmaceutical manufactures of similar over the counter medicines and other prescription medications and vaccines.

In addition, in October 2016, GSK Plc divested its drinks bottling and distribution business that manufactures and distributes Lucozade and Ribena in Nigeria, and other assets including the factory used for the drinks business to Suntory Beverage & Food Limited. The loss in revenue from these popular brands continues to impact its topline.

GlaxoSmithKline (GSK) is a global healthcare company and is well-known and acknowledged for its pioneering role in discovering and distributing vaccines for the likes of hepatitis A and B, meningitis, tetanus, influenza, rabies, typhoid, chickenpox, diphtheria, whooping cough, cervical cancer and many more.

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It is also renowned for its manufacture and distribution of prescription medicines such as antibiotics and treatments for such ailments as asthma, HIV/AIDS, malaria, depression, migraines, diabetes, heart failure, and digestive disorders.

Perhaps GSK Plc’s fortunes may change if the company is able to obtain the parent company’s licence to manufacture GSK-owned vaccines and prescription medicines within the country while also exploring the possibility of extending the sale of its products outside the shores of the country.

Since different expertise is required for vaccines and prescription drug manufacture and distribution as compared to manufacture and sale of consumer healthcare products, perhaps another alternative may be for the company to create two separate companies with one company being a 100% vaccines and prescription drug pharmaceutical manufacturing and distribution company while the second company specializes entirely in the manufacture and sale of consumer healthcare products.

As a result of the Q1 2021 performance, the company’s earnings per share (EPS) dropped to -20 kobo compared to the 9 kobo earnings per share reported in Q1 2020. At the start of 2021, GSK Plc’s share price was ₦6.90 but the company has since lost over 10% of its price valuation as the company’s share price closed at ₦6.20 on April 30, 2021.

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Blurb

NB Plc’s share price and dividends keeping shareholders happy

It was not all hunky-dory for the company as its cost of sales jumped from N48.3 billion in Q1 2020 to N66 billion in Q1 2021.

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Jordi Borrut Bel, Nigerian Breweries Plc

Nigerian Breweries Plc (“NB Plc” or the “Company”) reported its first-quarter (Q1) 2021 results on April 23, 2021.

The company’s performance was impressive considering the headwinds it faced late in 2020 and early 2021 from inflationary pressures, poor consumer purchasing power, lethargic economic growth, and increase in the company’s beer prices which took effect from Q4 2020.

The company achieved a net revenue for the three months to March 31, 2021 of N105.68 billion compared to N83.23 billion for the same period to March 31, 2020 — a 27% increase compared to the Q1 2020 results.

It also achieved a N39.67 billion gross profit — a 13.7% increase in gross profit compared to Q1 2020.

Quarter-on-quarter EBITDA rose by 22.8% from N19.82 billion in Q1 2020 to N24.34 billion in Q1 2021. Other positive outcomes quarter on quarter were the increase in operating income (from N10.94 billion to N14.49 billion), profit before tax (from N8.3 billion to N11.51 billion), and profit after tax (from N5.53 billion to N7.66 billion).

It was not all hunky-dory for the company as its cost of sales (direct costs attributable to NB Plc’s production) jumped from N48.3 billion in Q1 2020 to N66 billion in Q1 2021, an increase of N17.7 billion. According to the company, its costs are subject to seasonal fluctuations as a result of weather conditions and festivities. As a result, the company’s results and volumes are dependent on the performance in the peak‐selling season, typically resulting in higher revenue and profitability in the last quarter of the year.

The total cost of sales, marketing and distribution, and administration expenses grew from N72.47 billion in Q1 2020 to N91.63 billion in Q1 2021 – a jump of 26.43%. This jump was largely attributable to the cost of raw materials and consumables which grew to N46.53 billion (compared to N30.2 billion for the same period in Q1 2020).

The raw materials cost pressure has been a trend since Q2 2020 driven by the rising commodity prices, foreign exchange devaluation and domestic inflationary pressures. As a result, the cost of the raw materials to net income ratio has continued to rise. This ratio was 36.3% in Q1 2020 but has risen to 44% in Q1 2021.

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What may be a source of particular concern for the company is how well working capital is being managed from a liquidity and leverage perspective. The company reported cash and cash equivalents of N30.37 billion in Q1 2020, this had dropped to N18.43 billion by Q1 2021. In the same period, trade debtors and other receivables (i.e., those that owe the company for purchases that have not been paid for) had increased from N11.42 billion in Q1 2020 to N23.48 billion in Q1 2021, an increase of over 105% in just 12 months!

More worrying, in terms of magnitude, are trade creditors and other payables (i.e., those that the company owes payments for goods and services purchased) which grew from N139.2 billion in Q1 2020 to N145.41 billion in Q1 2021, a rise of N6.21 billion (or 4.5%) in just 12 months.

While the company’s loans and borrowings had reduced significantly (short-term loans in Q1 2021 was N35.65 billion versus N39.64 billion in Q1 2020; and long-term loans in Q1 2021 was N15.87 billion versus N51,81 billion in Q1 2020), the cost of borrowing, that is, interest expenses that the company paid on borrowed funds, rose from N2.7 billion in Q1 2020 to N3 billion in Q1 2021. This suggests that while short term and long-term borrowing have reduced, working capital needs are being refinanced at a higher cost or alternatively, most of the reduced short term or long-term borrowings have simply been restructured from longer-term loans to shorter-term overdrafts and commercial papers with a higher interest expense. The balance sheet as of Q1 2021 showed a liability in the form of bank overdraft and/or commercial papers of N21.44 billion which was not in the books in Q1 2020.

The first-quarter report also showed that as of March 31, 2021, the company had revolving credit facilities with five Nigerian banks to finance its working capital with the approved limit of the loan with each of the banks ranging from N6 billion to N15 billion (total N66 billion). N9 billion of the available amount was utilized at end of March 2021 (2020: Nil).

It should be noted that NB Plc’s financial statements for the 3 months ended 31st March 2021 are yet to be independently audited, so the results may be further improved or be worse, depending on the views and professional opinion of the external auditors in terms of accounting treatments and management judgement on significant transactions.

From the company’s numbers and explanations, the results are clearly driven by:

(1) Benefits from its increased pricing with the raised prices taking effect from December 10, 2020. The increases ranged from 5.2% to 6%, mainly on selected brands packaged in aluminium cans and on the 600-ml Star Larger returnable glass bottle.

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(2) Volume growth in its premium brands (particularly Heineken) and non-alcoholic portfolio (particularly Maltina).

(3) Relative inelastic demand for its portfolio mix despite price increases, availability of substitutes, and stagnate consumer wages eroded by inflation. In economics, inelastic demand occurs when the demand for a product remains static or changes less than changes in price.

Overall, the company achieved outstanding results that would have confounded analysts’ estimates. Given continued inflationary trends and currency depreciation, it would be interesting to see whether turnover and profitability growth are sustainable over the remaining quarters of the year. On its financial year 2020 performance, the company paid a final dividend of NGN0.69 in April 2021 (interim of NGN0.25 paid in December 2020). If the trend is sustained, it can only be good news for NB Plc in terms of increases in its share price and dividends for its shareholders.

Heineken Brouwerijen B.V owns 37.73% of the company to which NB Plc pays annual technical service fees and royalties.

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