Oil and Gas Free Zones Authority Nigeria

Berger Paints Plc: A Challenging Year Ahead

By Folakemi Emem-Akpan

Projections/Future outlook

Our analysis of Berger Paints Plc’s 2016 financial report shows that the 2016 financial year was a good one for the company when the results are considered without a historical reference and without reference to the industry standards for the period. While the company recorded profitability ratios, such ratios were generally lower than those of the previous year, and fell short of industry averages in many aspects.

We predict that 2017 might prove as challenging a year as 2016 was for the company. To come out tops in its industry, the company will have to focus on stepping up revenue generation, and reduce administrative costs as much as is possible.

Capital adequacy

While Berger Paints’ equity could not finance a higher proportion of its total capital in 2016 than it did in the preceding year, its capital adequacy for the year under review was still high enough to compete against industry standards.  The result for the year was 93.1 per cent, slightly lower than the 94.0 per cent recorded in the erstwhile year, but very much on par with what was obtainable in the industry for the period under review.

Management

Dr. Oladimeji Alo is the chairman of the company. With a background in industrial sociology, he is a scholar, management consultant and a corporate governance enthusiast. He at one time pursued a career in academics during which period he served as a lecturer at OAU, University of Benin and University of California, Los Angeles. He began his consulting career with Price Waterhouse Associates in 1985. He served as MD/CEO of Financial Institutions Training Centre for 13 years, and is a fellow if CIPMN and CIArb.

Mr. Peter Folikwe is the company’s MD. With a BSc in marketing and an MBA, Folikwe has garnered more than 26 years of experience in marketing, sales, distribution and general management, has worked with top rated companies such as UAC Foods, Vitafoam and MTN. he is a fellow of National Institute of Marketing and an alumnus of Lagos Business School and Cranfield University Bedford, UK.

Earnings

The company did not perform as well in 2016 as it did in 2015 in terms of return on assets (ROA) and return on equity (ROE). ROA was 6.6 per cent while ROE was 8.6 per cent, both lower and worse than the ratios of 14.5 per cent and 12.7 per cent respectively in the preceding year. These lower ratios do not indicate a better management of key assets.

Liquidity

Berger Paints performed quite well in terms of liquidity ratios for its 2016 financial year, but not as well as it did in 2015. While it was not better able to convert assets into needed funds as quickly as it did in 2015, its results still surpassed 2016 industry standards. Current ratio, which measures whether or not a firm has enough resources to pay its debts over the next 12 months, was 1.2 times, lower than the preceding year’s 1.9 result. At 0.37 times, cash asset ratio also was much higher than the generally acceptable 0.2 times, meaning that the company has readily available funds to pay off current liabilities.

Operations

For its 2016 financial year, Berger Paints recorded a slowdown in almost all of its major parameters, and this had a regressive effect on profitability. First, the company’s gross earnings dipped to N2.6 billion, 13.9 per cent lower than the N3.02 billion recorded in the preceding year. This 13.9 per cent decline rate is as compared to a decline rate of 1.9 per cent in 2015.

After operations, Berger Paints was left with a pre-tax profit of N272 million, 51.9 per cent lower than the N565 million pre-tax profit recorded in the erstwhile year. This 51.9 per cent decline rate is also as compared to an after-tax profit decline rate of 32.2 per cent for the same period.

After-tax profit closed at N224  million, lower than N330 million in the prior year.

Actual Vs sustainable growth

For the review year, the company recorded a distributable profit of N224 million, N144 million of which it dedicated to dividend payment, and N89 million of which it retained. It  therefore it had a retention ratio of 0.38, at about the same ratio it had in the past year.

With a profit margin of 10.4 per cent (lower than 18.7 per cent in 2015), an asset turnover of 0.63 times (lower than 0.78 times in 2015), and an assets/equity ratio of 1.58 (slightly higher than 1.51 times before), the company had a sustainable growth rate of 3.9 per cent for the period under review. This means that the company had only a 3.9 per cent inherent capacity for growth during the course of the year, a decline over the 8.1 per cent result in 2015.

Stock market performance

The Berger Paints stock is one of the median priced stocks on the Nigerian Stock Exchange (NSE), and our analysis shows that it is slightly undervalued at its current market price of N7.00. As at the analysis date of August 31 2017, net assets per share was N8.99, and this was just a little higher than the current market price and suggests undervaluation.

The company is also worth a little more in its books than it is selling for on the NSE at now, as shown by a higher book value as compared to its market value. While book value is N2.6 billion, current market capitalisation is a slightly lower N2.02 billion. This also, is a sign of undervaluation.

We recommend a buy at this price.

Conclusion

Because the Berger Paints stock is median priced and it is one that pays dividend, we recommend it for purchase for investors, and the good news is that the average investor  has the necessary financial leverage to buy into the company because it is not so expensive.

 

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