Berger Paints: Uninspiring Earnings to Dampen Shareholders Return –Meristem

Berger Paints: Uninspiring Earnings to Dampen Shareholders Return –Meristem

Berger Paints Plc uninspiring earnings in the financial year 2020 is expected to dampen shareholders return.

Traded on the Nigerian Stock Exchange at ₦6.05, Meristem Securities forecast a December 2020 price target of ₦3.02, an indication that Berger Paints Plc could be overpriced today.

Relatively, this gives a 50% downside potential which also explained analysts sell rating on the company stock.

In the first half (H1) of 2020, Berger Paints reported a revenue growth of 10.98% to ₦1.69 billion from ₦1.53 billion in the first half (H1) of 2019.

This half year revenue growth was reported despite the fact that the company’s sales dropped by 2.43% in the second quarter (Q2) of 2020.

Analysts explained that the increase was realized from 10.98% surge in sale of paints and significantly 237.62% increase in higher contract services rendered during the period.

Although, Meristem Securities Limited said the firm observed that trade receivables increased by 29.81% from 2019, suggesting increased credit sales.

The investment firm explained that Berger Paints shows no letup in its efforts to increase market share in the highly fragmented and competitive industry as it intensifies on marketing and rebranding, evinced by a 4.97% increase in selling and distribution expenses.

It is noteworthy that the company recently completed its 7-year long automated plant project.

This new plant puts the company’s installed capacity at 8 million liters per annum from 5.6 million liters per annum.

Meristem said when considered in line with marketing efforts and the potential demand, especially in the decorative segment, it is expected to positively impact the momentum of topline growth.

“Going forward, as lockdown measures are eased, we expect demand to pick up gradually in Q3:2020 and beyond as we begin to see a rebound in economic activities.

“Thus, we project revenue to settle at ₦3.83bn in 202FY; a 7.00% growth compared to ₦3.59bn in 2019”, analysts at Meristem stated.

In terms of financing, Berger Paints finance costs undermine bottomline performance in the period, therefore impacted profitability.

During the period, the company witnessed a 31.82% surge in direct costs year on year to ₦1.11bn as raw material expenses increased by 22.27%.

This increase was as a result of the FX adjustment, while contract services expense also spiked by 166.32%, as analysts explained that this fell in line with the rise in contract services rendered.

However, the rise in direct costs clearly pared gross margin to 39.10% in H1:2020 from 46.05% in H1:2019.

Meristem said the effect of the cost build-up on operating margin was exacerbated by an elevated operating expense.

Operating expenses came handy, climbed higher by 18.59% on account of increased sales and marketing personnel and higher distribution costs (+8.92%).

Though, cost inflation is factor to also be considered that pushed operating expenses further.

Consequently, analysts said operating margin sank to 5.09% in H1:2020 from 13.60% in H1:2019.

Analysts reckoned that interest obligations on lease liabilities and payment of accrued interest on its Bank of Industry loan led finance costs to increase 3.51x to ₦40.04 million from ₦8.87 million in H1:2019.

This weighed heavily on profit after tax as it declined by -71.79% to ₦41.09 million compare to ₦145.65 million.

Thus, net margin was visibly lower at 2.25% compare to 9.30% in H1:2019.

Meristem said: “Going forward, we expect the just completed automated plant to yield some cost savings for the company through the reduction in material handling and process lead time.

“However, we are not oblivious of the effect of the CBN’s FX adjustment on cost of import requirements.

“On a balance of factors, we expect direct cost to increase by 15.84% at the end of the year.

“Also, we expect finance costs to increase by 240.31%, mainly on the back of subsequent payments of interest obligations on its lease liability”.

The investment firm then project a lower profit of ₦171.68mn as against ₦448.73 million in 2019 for the year.

Lackluster Earnings in 2020 to Dampen Shareholders Return

Meristem said the outlook for return to shareholders is not helped by expectations of pressured earnings in 2020.

Although the company’s annualized return on equity (ROE) currently stands at 11.31% compare to peer average of 12.56%, it lags 2019 performance of 14.95% which was mainly a result of the weaker net margin in 2020 so far.

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While the company’s liquidity metrics suggest a comfortable standing with working capital of ₦349.88 million and a current ratio of 1.21x, Meristem expressed worry over its long term cash generating abilities.

This worry came following the elongated operating cycle – 45 days in H1:2020 as against 21 days in 2019, CAP; – 36days.

For 2020, analysts at Meristem projects an earnings per share (EPS) of ₦0.59 and price earnings ratio of 5.10x to arrive at our December 2020 target price of ₦3.02.

This turns out to be a downside potential of 50.08%, hence Meristem said it maintains SELL rating on the counter.

Berger Paints: Uninspiring Earnings to Dampen Shareholders Return – Meristem