Berger Paints: Poor Liquidity, But Good for Long Term Positioning

Company: Berger Paints Nigeria Plc
Current Market Price: 9.00
Intrinsic Value: N10.91
Latest Cash Div: N0.50
By: Jeariogbe Tunde Segun (Equity Analyst)

Key Financial Tickers:
• The most recent cash dividend paid by Berger Paints was 50k for the financial year ended December 31, 2017.
• By record, Berger Paints has been consistent in rewarding investors on a yearly basis in terms of cash dividend. Although dividend payout dropped in two financial years prior due to the harsh economic environment.
• With low share outstanding, shareholders of Berger Paints are sure of good portion of the company’s income at the end of the year.



Strength
• Although there exists various manufacturers of paint products most of which get to the end users at cheaper rates, Berger Paints enjoys the economics of scale over other local manufacturers.
• Due to its capacity to engage professionals in its industry, Berger Paints is known for its reputation in setting standards in the Nigeria paint industry.
• Considering its strong clientele base, Berger Paint is the company of choice when it comes to major corporate and government projects.
• Berger Paints is the only paint manufacturer in Nigeria operating in the five key paint making segments namely:
 Decorative/Architecture Finishes
 Marine and Protective Coatings
 Automotive/Vehicle Finishes
 Industrial Coatings
 Wood Finishes and Preservers

Challenges
• Tight business environment, especially in the area of:
 Foreign Exchange instability
 Power generation and
 High cost of funds, amongst others
• Tough competition from smaller manufacturers of paint products, in an industry that is highly fragmented, having over 500 operators.
• Most of these operators are local manufacturers who operate in unstructured markets, providing cheap and sometimes substandard product for the masses who bother less about quality. Nevertheless, the structured players control between 65-70% of the market.
• Free entry and exit into the business.

Corporate Figures
• In its full year2017 financial performance figures, turnover improved YoY by 18.81%, while in the first quarter 2018 it only grew marginally above comparable period of 2017 by 5.79%, from N788.65 million in 2017 to N834.33 million
• Operating Profit dropped by 19.64% against 2017 first quarter’s estimate. This is as a result of marginal increase in cost of sales along with the operating expenses
• Consequently, Profit before and after Tax dipped against similar period of 2017 by 20.68% each.
• Reflecting the marginal performance, Retained Earnings improved marginally by 2.20% against last year’s figures.
• See below for details:

Liquidity/Risk Ratios
• Unlike the previous year, the management of Berger Paints, used lower debt through the first three months of 2018. As shown in the below table, debt used through the quarter was 14.23% of equity, compared to 30.55% in the first quarter of 2017. Although this has secured and guaranteed investors’ safety, we are of the opinion that using more debt to finance activities will improve the company’s profitability and improve investors’ take home at the end of the year.
• The current ratio is above unity. This implies that the company has enough financial strength to pay off its short-term obligations as and when due. This confirms the healthy financial state of Berger Paints
• Perhaps due to liquidity issues, the share price of Berger Paints enjoys low investor’s patronage compared to industrial peers.
• Further confirming the healthy financial state of the company is the high Interest Coverage ratio. Please note that Berger Paints controls higher Interest Coveraged compared to industry peers.

Profitability Ratios
• The Cost of Sales margin increased by 7.11% slightly above the increase in the Turnover figure. As shown in the table below, the CoS margin is currently 55.34% as against the 51.67% achieved last year.
• Profit before Tax dropped against the previous quarter’s by 25.02% having moved to 12.36% from 16.48% last year
• Similarly Profit after Tax Margin dipped against 2017 first quarter estimate by 25.02% from 11.21% to 2.59%
• Both Return on Average Equity and Assets are quite low at 2.59% and 1.60%
• In conclusion, we score the management of Berger Paints low, we are of the opinion that it could achieve better profitability ratios.

Efficiency Ratios
• The management fairly outran the Total Asset Turnover achieved in 2017, which only improved by 1.81% from the 18.74% estimated in 2017 to the current 28.84%.
• Equity Turnover is relatively low at 30.77%, a 6.69% improvement from the 28.84% achieved in Q1-2017
• Equity multiplier is considered fair at 1.61x an increase of 4.79% from the 1.54x last financial year.

Investment Ratios
• Reflecting the impact of lower capital used for business through the first three months of 2018, the amount earned by the management of Berger Paints per 50k share was below the comparable period of 2018 by 20.68%.
• The 24k earned is same as 2.57% of the current market price of Berger Paint share, this is a 50.38% of the yield achieved during the similar period of 2017
• Thus, the PE/Ratio jumped by over 100% to 9.71x from 4.82x
• Nevertheless, going by the Price to Book Value ratio, Berger Paints’ share price is fairly priced, as confirmed further by the estimated Book Value of N9.35, same as 0.35% below market price of N9.40.

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