Livestock Feeds Earnings Quality Drop as Revenue, Profit Jump
In 2020, Livestock Feeds Plc. –pioneer manufacturer of animal feeds in Nigeria– recorded its highest revenue on records since the financial year 2014, analysts at Meristem Securities said in a report.
However, the company’s earnings quality drop following a strong increase in inventories and receivables at the time when the company reportedly raised animals feeds prices. With a significant amount locked down in receivables and inventories, cash position was impacted given the level of amount of sales reported.
Rising inflation rate in the country impacted input costs strong enough that farmers dropped the ideal of self-productions of feed mills for their livestock. So, Livestock Feeds Plc.’s output became the best choice for the year due to its economic of scale advantage as farmers sought to reduce their animal feeds costs.
For 19 consecutive months, the average increase in the general price level has maintained an uptrend before it settled at 18.17% in March, however, it is projected to rise further.
Revenue Touches 5-Year High
In 2020, feeds demand was strong as many Nigerian households move into livestock farming in recent times amidst a high unemployment rate data. While demand skyrocketed, production costs also jumped as competition for consumers’ wallets increase. Livestock Feeds Plc. recorded 12.3% revenue growth from NGN9.96 billion in 2019 to NGN11.18 billion in 2020 – representing the firm’s highest revenue on record since 2014.
Analysts said the growth stemmed from an increased product price during the year, and robust demand from poultry farmers as feed-milling inputs became more expensive.
“Poultry farmers’ ability to formulate their own feeds was no longer the cost-effective route which then pushed demand”.
The development in the farming segment of the economy lifted revenue growth for animal feed millers like Livestock Feeds Plc. On a regional basis, sales from Aba, Ikeja, and Onitsha (West and Eastern Nigeria) saw the most improvement, up 24.45%, 11.98%, and 77.37% respectively.
In contrast, sales slumped 11.27% year on year in the North, constrained by the effect of the pandemic on the company’s supply chain and distribution channels, Meristem added.
Livestock Feeds Earnings Quality Drop as Revenue, Profit Jump
Channel checks show local maize prices remain on the high side – due mainly to supply shortfalls. However, analysts are expecting the Federal Government’s intervention to crash maize (and feed) prices in the near term. Meristem Securities recall that the Central Bank of Nigeria (CBN) had in March commenced the disbursement of about 300,000MT of maize under its Anchor Borrower’s Program (ABP).
The program actually seeks to bridge the domestic supply gap.
“It is on the back of this that we project slightly lower average feed prices over 2021. Thus, we forecast a 6.60% year on year growth in revenue to NGN11.92 billion”, Meristem said.
Profitability Improved Despite Higher Finance Costs
The feed miller was faced with inflationary driven costs but this was not strong enough to pull back profitability – resilience, effectiveness, and efficiency came to play.
Meristem Securities said while the cost of sales increased by 8.37% to NGN9.89 billion, the cost to sales ratio improved from 91.70% to 88.50% due to faster revenue growth. As a result, the gross margin improved to 11.50%, from 8.30% in the previous year.
It was noted that Livestock Feeds Plc. sustained its promotional efforts in the year, which help drive a 10.04% year on year increase in selling and distribution expenses.
Similarly, administrative expenses also inched higher, up 7.64% to NGN360.79 million – as salaries and staff benefits jumped to NGN119.54 million, from NGN98.20 million -now 33.13% of total admin. costs.
Nonetheless, the benefit from topline growth trickled down to operating income, with operating margin climbing to 6.14%, three times more than 2.06% in 2019.
Obligations on the company’s capital mix inched up in the period amidst increased business activities. It was noted that finance costs jumped significantly by 35.61% to NGN104.09 million.
“This increase was due mainly to a new commercial loan obtained in tranches of NGN50 million, NGN250 million, and NGN1.99 billion from First Bank of Nigeria Plc”, Meristem Securities said.
However, Livestock Feeds Plc. also paid down an outstanding NGN955.27 million on the Commercial Agricultural Credit Scheme (CACS) loan during the year.
“We think the company’s debt profile remains at sustainable levels, with interest coverage ratio improving to 4.90x as at year end 2020 from 1.99x in 2019”, analysts said.
The strong topline performance and not so bad to managed direct cost and overheads led to a better than expected earnings scorecard for the company amidst the pandemic.
Eventually, Livestock Feeds Plc. delivered a pretax and post-tax profit jumped 384.84% and 373.13% year on year respectively to NGN546.07 million and NGN503.19 million – which resulted to a net margin of 4.50%.
Deterioration in Earnings Quality
Despite the improvement in the bottom line, analysts said earnings quality deteriorated in 2020. The company’s numbers showed there was an improvement in working capital to NGN1.24 billion from NGN0.71 billion in 2019.
A closer look reveals that the increase in working capital was driven by 77.67% and 130.52% year-on-year growth in inventories and trade receivables respectively, analysts explained.
“This suggests poor earnings quality as trade receivables now constitutes about 70.56% of net income, translating to -1.46x in terms of quality of earnings ratio.
For financial 2021, analysts at Meristem Securities forecast an EPS of NGN0.11 and applied a target PE of 12.79x to arrive at a target price of N1.48, advised investors to dump the stock over lack of upside advantage.
Livestock Feeds Earnings Quality Drop as Revenue, Profit Jump
