BERGER PAINTS: WEAK SALES, EARNINGS CAN'T SUPPORT PRICE RALLY

Berger Paints Nigeria Plc was established as British Paints West Africa Limited on January 9, 1959 and commenced business in 1961 after two years of preparation by importing paints from its principle partners in the United Kingdom for sale in Nigeria. In March 1962, Berger commissioned its first factory in Lagos, which was the first paints factory in Nigeria.  The company was also the first paints manufacturer to be listed on the Nigeria Stock Exchange on March 14, 1974. It grew through several phases to achieve its current state. In 2012, Berger Paints Nigeria Plc entered into a partnership arrangement with the biggest paint company in South Korea, KCC to jointly serve the Nigerian paint and coating market. However, his move by the company has not bettered its performance, with its sales and earnings power relatively weak. 

Berger Paints Nigeria PLC
Share Holding Structure
CAB/Oversees Holdings Ltd, UK	11.26%
Other Nigerians and Associates	88.74%
Other Statistics
Shares Outstanding (MN)	289,823,447
Opening Price (2014)	N8.00
Close price ( 2014)	N8.60
Opening Price ( 2015)	N9.00
Current Price	N11.00
Date Listed	1974
Year End	31ST December

It is obvious that Nigerian paint sector is characterized by stiff competition due to increasing cottage companies springing up as a result of free entry and exit due to low cost operation associated with the industry. The earnings prospects of the sector has not reflected on Berger Paints numbers.  Painting sector has a picture of a step up in sales revenue growth and profit performance in recent years and going forward, but Berger paints has not demonstrated capacity to turn this opportunities to sales and profit.

2014 Performances Analysis

The company's management team led by the acting Chief Executive,   Mr. Kola Ajayihas managed to record a mild performance,k the strong business strategiesunveiled in 2014 numbers.

In the period under consideration, the sales revenue witnessed a slight growth to reflect the stiff competition in the paint market. While bottom-line was down significantly, owing to the cost of sales which was equally up. The company increased its dividend payout by 7.14 percent to 75kobo from 70 kobo it paid for two consecutive year in the last five years and 2014 earnings power of the company did not support dividend payment of 75 kobo as its net earnings per share stood at 51 kobo for the period meaning that the company is putting hands into its retained earnings even as it declined marginally to pay for 2014 financial year dividend.  As its first quarter EPS of 4 kobo moved to 17 kobo in second quarter, representing more than 100 per cent increase, while third quarter was 38 kobo and full-year EPS of 51 kobo. It still has substantial headroom to pay as much in the years ahead, but the future probability of similar dividend is low and depends on its earnings capacity. Turnover was up by 13.82 per cent to N3.08 billion but profit after tax declined sharply by 40.79 per cent to N148.81 million.

The price performance for the year was relatively stable due to its small quantity shares in issue and the holding structure of the company. PRICE oscillated in the first quarter and rallied in the second quarter, before it came down due to profit taking, while price was side trending in other quarters of the year as a result of market sentiments. On the long run, it is expected that earnings power will determine price direction in the future.

Five Years Financial Figures of Berger Paints Plc
Company Figures
	2014		2013		2012		2011		2010
Turnover	3,082,930,000		2,708,448,000		2,513,664,000		2,375,563,000		2,756,610,000
Profit After Tax	148,808,000		252,346,000		192,009,000		266,990,000		442,460,000
Net Assets	2,529,855,000		2,435,702,000		1,774,108,000		1,678,755,000		1,676,660,000
Dividend	0.75		0.70		0.70		2.00		0.50
Bonus	nil		nil		nil		nil		nil
Estimated Ratios
EPS	0.51	0.87		0.88		1.23		2.04
PE/RATIO	15.98	10.26		11.28		10.23		6.18
E/YIELD	6.42	9.74		8.87		9.77		16.19
BOOK VALUE	8.49	8.40		8.16		7.72		7.71
ROCE	6.00	10.00		11.00		16.00		26.00
PROFIT MARGIN	4.83	9.28		7.64		11.24		16.05
YEAR END	December	December		December		December		December

Five-Year Financial Analysis.

Looking at the financials of Berger Paints for the period of five years, the numbers revealed that management grew year-on-year sales turnover to 2.37 per cent CAGR from N2.76 billion in 2010 to N3.08 billion. Also, profitability level for the period was down by 13.27 percent CAGR to  N148.91 million from N442.46 million in 2010, after it had try to reverse the down trend of its profitability level in 2013 at N252.35 million. The company's earnings power has been inconsistent to reflect the cost headwind in its operations and stiff contention.  When the latest figure of 2014 was compare to the reported profit, it resulted in a profit margin of 4.83 per cent. Meanwhile profit margins nosedive south year on year which is an indication of increased costs cum tax during these periods. This is poor and low in all standard.

In the same direction, shareholder’s funds for the period grew from N1.68 billion in 2010 to N2.53 billion, representing a growth of 50.60 per cent.

The growth recorded in the total equity was impressive and has supported the book value which equally rose from N7.71 in 2010 to N8.49 in 2014.

The recent uptrend is the case when the said growth is compared to investors’ response in terms of market price valuation as the share price on the floor of the Nigerian Stock Exchange rallied before side trending at the market value which was triggered sentiment not the 24 kobo first quarter EPS. The company has not been able to convert its assets to money. On the strength of its numbers, the fair value is estimatedat N8.82.

Estimated Performance Ratios

Berger Paints earnings per share for the five-years have beendwindling as reflected in the company earnings power despite the injection of fund by way of rights in 2012  it profit level have equally been weak  for the period under review. The amount earned per share dropped from 204kobo in 2010 to 51kobo in 2015.  The falling  earnings within the period had increased   investors waiting period  to  15.98x as at the market value when the report was released, after it had recorded a  P/E ratio of  6.18 times in 2010. Book value during the period grew from N7.71 to N8.49 indicating that the stock is selling at premium.
Other performance ratios remained depressed including the profit margin is still pointing at high cost of operations.

CURRENT 2015 RESULT

Meanwhile, Berger Paints' first quarter result for the period ended March 31, 2015 was made available to the market recently, consistent with the release date of 2014 figures. The numbers revealed impressive performance as its top and bottom lines were northward. Sales revenue looked strong, compared with that of the corresponding period by 20 per cent from N587.85 million in 2014 to N705.93 million. Profitability level for the period was up significantly by 692percent to N70.03 million from N8.78 million in 2014. The company's cost of operation for the period hampered its profit as reflected in the profit margin for the quarter, with all expenses rising, just as the provisions for tax. Net assets was up to N2.53 billion from N2.49 billion last year. Its earnings per share for the period went up to 24 kobo from 4 kobo in 2014.

The 24kobo EPS for the first quarter is a replica of the price in 9.88x, which is lower than the 55.07x recorded last year. The first quarter book value for the period stood at N8.73. The increase in profit margin compared to last year’s is evidence of  expected improved profit in the sector as building industry remained the driver of economy diversification with huge potentials for players in the painting market to harness.

Berger Paints  PLC
FIRST  QUARTER
COY	2015	2014
	(N)	(N)	% Chg
Date Released	April 21, 2015	April 25, 2014
Gross Earnings	705,930,000	587.851,000	20.09
Profit After Tax	70,025,000	8,783,000	697.3
Shareholders' Fund	2,529,855,000	2,487,421,000	1.71
ESTIMATED RATIOS
Earnings Per Share	0.24	0.04	500
PE Ratio	9.88	55.07
Earnings Yield	2.53	0.45
Book Value	8.73	11.44
ROE	2.77	0.35
Profit Margin	9.92	1.49
Year End	Dec	Dec

Technical View

Price action of Berger Paints has been trending down to reflect its performance before galloping to this level due to market sentiment.  The bullish channel is showing a markup in the price of the stock, with the price touching the upper channel line is indicating a resistance of break out or down. On this note traders are advice to wait for a pullback before anything.  Correction in price is imminent as Berger Paints is trading above short and long moving average of 50 and 200 days.

Valuation

The equity looks very overpriced  at the current market value, as the Price to Sales Ratio for full-year 2014 and first quarter 2015 stands at 0.75x and 4.52x respectively. Meanwhile, the Book Value reveal an overpriced situation. Thus, each unit of Access Bank is fairly priced at N8.82.

Analysts Opinion/Recommendations

The sector has strong profit prospects as any sales can easily be converted to earnings and creative company in the industry with strong innovative strategies would attract sales and profit. Traders should look away from the stock now until a pullback before considering to enter. On the other hand, the management needs to concentrate efforts on strategies capable of building performance indices to post better figures in subsequent quarters and years so that its share price would be supported. This will definitely increase investo’ confidence in the company.