The Nation Newspaper

Category: Due Diligence

  • MRS Oil Nigeria: Losing fuel

    MRS Oil Nigeria Plc’s high financial leverage continued to compound its sluggish business performance, underlining a complex situation that has, in recent years, continuously decimated the profitability and returns of the petroleum-marketing company.

    Audited report and accounts of MRS for the year ended December 31, 2012 showed that the company remained under extreme pressures from its dependence on bank loans, the resultant high interest expense and less-than-optimal turnover.

    While turnover grew by 11.5 per cent, an increase of 163 per cent in interest expenses overran the profit and loss accounts, leading to declines of 73 per cent and 67 per cent in profits before and after tax respectively. The worsening bottom-line passed on to shareholders, with further reduction in cash dividend by about 67 per cent.

    However, one-third reduction in outstanding loans relieved the edgy balance sheet position. While total assets dropped by about 24 per cent, total liabilities declined by 32 per cent, leaving the company in better financing position. Modest improvement in working capital and lower gearing ratio underlined a commendable balance sheet restructuring, although it still remained substantially susceptible.

     

    Financing structure

    Total balance sheet size stood at N55.6 billion in 2012, indicating a drop of 23.5 per cent from N72.7 billion recorded in 2011. Balance sheet size was depressed mainly by 32 per cent decline in current assets from N49 billion to N33.2 billion. Long-term assets had slipped from N23.7 billion to N22.4 billion.

    Meanwhile, total liabilities also dropped by 32 per cent from N53.71 billion to N36.54 billion. Current liabilities had declined by 36 per cent from N46.76 billion to N30.1 billion, reflecting similar decline in bank loans from N21 billion in 2011 to N13.46 billion in 2012. While the paid up share capital remained unchanged at N127 million, some 254 million ordinary shares of 50 kobo each, total equity funds inched up from N18.99 billion to N19.05 billion.

    The decline in loans and current liabilities and the stability of the equity funds mixed into better financing structure. Debt-to-equity ratio improved from 111 per cent in 2011 to 71 per cent in 2012. The proportion of equity funds to total assets also improved from 26 per cent to 34 per cent.

     

    Efficiency

    MRS undertook major staff downsizing in 2012 as average number of employees nearly halved from 203 persons in 2011 to 109 persons in 2012. Staff costs declined correspondingly from N1.53 billion to N812.7 million. Average staff cost per employee dropped slightly from N7.51 million to N7.46 million. Notwithstanding the restructuring, staff performance and productivity as well as general cost efficiency were relatively weak. Average contribution of each employee to the bottom-line halved from N6.96 million in 2011 to N3.48 million in 2012. Without the huge interest expenses, other costs were still slightly higher. Cost of sales and operating expenses amounted to 99.2 per cent of turnover in 2012 as against 98.8 per cent in 2011.

     

    Profitability

    MRS suffered considerable decline in profitability in 2012 with both outward profit and loss figures and underlying indices crashing to new lows. Average pre-tax profit per unit of sales dwindled from N2 in 2011 to 50 kobo in 2012 just as average return on each unit of N100 assets slumped from N1.90 to 70 kobo. The negative bottom-line performance was mainly orchestrated by significant increase in interest expenses, which overwhelmed the headroom created by modest growth in sales. Total turnover rose by 11.5 per cent from N71.49 billion to N79.73 billion. Top-line performance was driven largely by about 20 per cent increase in premium motor spirit from N49.15 billion to N58.92 billion. Total turnover was moderated by substantial declines in automotive gas oil, which dropped from N7.28 billion to N6.28 billion and dual purpose kerosene, which dropped from N2.54 billion to N1.71 billion.

    With 14.5 per cent increase in cost of sales from N64.67 billion to N74.02 billion, gross profit dropped by 16.3 per cent from N6.82 billion to N5.71 billion. Total operating expenses however decreased by 15.6 per cent from N5.98 billion to N5.05 billion. Non-core business income was almost flat at N1.07 billion compared with N1.09 billion in previous year. Finance expenses jumped by 163 per cent to N1.36 billion as against N517 million in previous year, laying the foundation for significant declines in pre and post tax profits. Profit before tax slumped to a low of N379 million in 2012 compared with N1.41 billion in 2011 while profit after tax dropped from N616 million to N205 million.

    Underlying fundamentals of the company were generally on the downtrend. Gross profit margin dropped from 9.5 per cent to 7.2 per cent. Profit before tax margin slipped to 0.5 per cent as against 2.0 per cent. Return on total assets dropped from 1.9 per cent to 0.7 per cent while return on equity dwindled to 1.1 per cent compared with 3.2 per cent recorded in previous year.

    The low profit performance depressed actual dividend payouts and the sustainability of even such payouts. With basic earnings per share dropping from N2.43 to 81 kobo, the company reduced dividend by the same margin. Gross dividend dropped from N178 million to N59 million, representing a dividend per share of 23.34 kobo for the 2012 business year as against 70 kobo paid for the 2011 business year. Dividend cover also dimmed from 1.94 times in 2011 to 1.37 times in 2012. Net assets per share was flat at N75.02 in 2012 as against N74.76 in 2011.

     

    Liquidity

    The liquidity position of the company meanwhile improved considerably during the period. Current ratio, which fundamentally indicates the ability of the company to meet emerging financing obligations, improved from 1.05 times in 2011 to 1.10 times in 2012. The proportion of working capital to total turnover also improved from 3.1 per cent to 3.9 per cent. Debtors/creditors ratio stood at 41 per cent in 2012 as against 52 per cent in 2011.

     

    Governance and structures

    Formerly known as Chevron Oil Nigeria Plc, MRS Oil Nigeria is owned by about 24,000 shareholders. One of the major downstream oil companies, MRS Africa Holdings Limited (Bermuda) holds 60 per cent majority equity stake in MRS Oil Nigeria while ZSL holds 7.71 per cent equity stake. Sundry Nigerian individuals and institutions hold the remaining 32.3 per cent equities. While the board has remained stable, the management of the company has seen many chief executives in recent period. Alhaji Sayyu Dantata, who doubles as the Chief Executive for MRS Oil Group, still chairs the board of MRS Oil Nigeria.

    Meanwhile, Mr Paul Bissohong was appointed the acting managing director following successive resignations of Mr Shardhashis Prasad and Mallam Musa Yahya.

     

    Analyst’s opinion

    The latest earnings report further underlines the need for a thorough review of not only marketing and financing strategies but also the long-term business growth strategy. While it made commendable effort to reduce short-term indebtedness, the company needs to still undertake substantial deleverage. Besides, it needs to develop a sustainable sales growth and cost management strategies to stabilise earnings and break the chequered trend that has marked the performance curve over the years. The overall performance outlook raises the urgency of a deeper restructuring.

     

  • Chams: Making a turnaround?

    Significant improvement in its core identity management business, improved cost management and increased productivity boosted the performance outlook of Chams Plc in 2012.

    Audited report and accounts of the company for the year ended December 31, 2012 showed a major turnaround as the technology innovation group harnessed substantial growth in turnover and improved efficiency to break away from its recent losing streak to profitability.

    With 249 per cent growth in its core business segment, strident cost management and internal efficiency initiatives being implemented by the management impacted positively on the top-down profit structure of the group.

    The group’s increasingly efficient cost management was underlined by 51 per cent decline in cost of sales and muted increase of 14 per cent and 1.7 per cent in operating expenses and finance expenses respectively. These turned around the bottom-line from a net loss of N1.24 billion in 2011 to a modest net profit of N87.5 million.

    While it could not declare any dividend, the positive bottom-line locked in values for shareholders and reassured on the prospects of the company. Return on equity turned positive at 1.9 per cent in 2012 as against -30.8 per cent in 2011. Return on total assets also curved from -15.2 per cent to 1.9 per cent.

    The liquidity and financing position of the group improved during the period, with more working capital and improved financing for emerging obligations.

    The structure and composition of its top-line however, remained precarious, largely dependent on unpredictable public sector’s projects.

     

    Financing structure

    Chams Group’s paid up capital remained unchanged at N2.35 billion, consisting of about 4.7 billion ordinary shares of 50 kobo each. Shareholders’ funds rose on the back of modest retained earnings to N4.49 billion, about 12 per cent above N4.01 billion recorded in 2011. Total assets increased by 10.5 per cent from N7.89 billion to N8.72 billion. Current assets rose by 40 per cent from N4.51 billion to N6.33 billion while long-term assets dropped by 22 per cent from N3.07 billion to N2.39 billion. Total liabilities stood at N4.23 billion in 2012 as against N3.88 billion in 2011, indicating marginal increase of 9.1 per cent.

    The financing position of the group remained steady. The proportion of equity funds to total assets inched up from 50.8 per cent to 51.5 per cent. Debt-to-equity ratio however, rose slightly from 23.3 per cent to 24.3 per cent. Current liabilities/total assets ratio was almost flat at 46.1 per cent as against 46.5 per cent while long-term liabilities/total assets ratio reduced from 2.7 per cent to 2.4 per cent.

     

    Efficiency

    There was noticeable improvement in the overall cost efficiency and productivity of the group. On the basis of estimated workforce of 500 persons, average level of productivity per head and relevant cost per unit of production showed improved optimisation. Average contribution of each employee to pre-tax profit improved from –N2.40 million in 2011 to N0.34 million in 2012. However, average cost per staff reduced from N1.03 billion to N0.75 million. The company had undertaken staff audit and performance review during the period. Total cost of the business, excluding finance charges, reduced to about 105 per cent of total sales in 2012 as against 181.6 per cent in 2011. The reduction in top-line and operating costs enabled the group to leverage the bottom-line from additional incomes from non-core businesses.

     

    Profitability

    Chams’ profit outlook showed considerable improvement in the intrinsic profit-making capacity of the company as it consolidated expansive sales growth into notable profitability. Both outward and underlying profit and loss measures indicated significant upturn in the profit outlook, headlined by replacement of previous loss of N1.24 billion with a modest profit of N87.5 million.

    Group turnover rose by about 60 per cent to N2.84 billion in 2012 as against N1.78 billion recorded in 2011. Top-line performance was driven by the group’s identity management solutions business, which recorded 249.3 per cent increase from N700 million to N2.45 billion. While cost of sales dropped by 51 per cent from N1.09 billion to N534 million, gross profit jumped by 235 per cent from N687 million to N2.30 billion. Operating expense remained muted at N2.45 billion compared with N2.14 billion while interest expense was almost flat at N230 million compared with N226 million in previous year.

    With these, Chams broke away from recent losing streak with a profit before tax of N170 million in 2012 as against pre-tax loss of N1.20 billion in 2011. After taxes, net profit stood at N87.5 million in 2012 as against net loss of N1.24 billion in 2011, representing an increase of 107 per cent. It thus replaced its basic loss per share of 26 kobo in 2011 with modest earnings per share of 3.0 kobo for 2012. The group’s net asset per share also increased from 85 kobo to 95 kobo.

    Underlying profitability indices showed generally positive outlook. Gross profit margin more than doubled at 81.2 per cent in 2012 as against 38.6 per cent in 2011. Profit before tax margin, which underlines average profit per unit of sales, turned around from -67.4 per cent in 2011 to 6.0 per cent in 2012. This implies that while Chams lost N67.4 on every N100 worth of operations in 2011, it made a modest profit of N6 on similar unit in 2012. The improved bottom-line also reflected on the underlying returns to shareholders and other stakeholders. Return on equity stood at 1.9 per cent in 2012 as against -30.8 per cent in 2011. Return on total assets also turned around from -15.2 per cent to 1.9 per cent.

    The company did not pay any dividend for 2012, which underlined the nascent recovery. Its last dividend payment was in 2009.

     

    Liquidity

    The liquidity position of the group improved considerably with more working capital and improved financing for emerging obligations. Current ratio, which relates available current assets to similar current liabilities, improved from 1.23 times in 2011 to 1.57 times in 2012. The proportion of working capital to total sales almost doubled at 81.4 per cent in 2012 compared with 47.4 per cent in 2011. Debtors/creditors ratio stood at 622 per cent in 2012 as against 208 per cent in 2011.

     

    Governance and structures

    Incorporated in 1985 as a private limited liability company, Chams converted to a public limited company in 2007 and listed its shares on the Nigerian Stock Exchange (NSE) in 2008 by way of introduction. Chams Plc and its subsidiaries offer complete end to end solution to small and large projects in the areas of identity management, payments, collection and transactional systems, as well as providing digital platform and ICT trainings. The Chams Group consists of four subsidiaries; CardCentre Nigeria Limited, which is engaged in the production and manufacturing of identity, payment and other smart cards; PayMaster Limited, which deals with deployment of Point of Sales (POS) terminals; ChamsAcccess Limited, a licensed consortium for the deployment of Automated Teller Machines (ATMs), which is also involved in the deployment of multi application terminals; and ChamsSwitch, which engages in provision of the e-payment transaction processing platform for the Nigerian Market.

    Chams is owned by about 8,500 shareholders with substantial shareholdings by financial and asset management companies and institutional investors. Nigerian institutional investors hold 48 per cent equity stake in the company.

    The board and management of the company have remained stable. Mr. Demola Aladekomo, the founding managing director and main promoter of the company, retained his position.

    Meanwhile, Prof. Adebayo Akinde retired as the chairman of the company earlier this month and Very Revd Ayo Richards was appointed as chairman. Akinde had served on the board for two decades and had been the chairman of the board in the past seven years.

    The company’s governance and reporting structures comply largely with extant codes of corporate governance and reporting standards.

     

    Analyst’s opinion

    The performance of Chams shows a ray of hope and reassures on the prospects of the company. It however, remains delicate and cautious. While the top-line performance was commendable, it was driven mainly by its one-line identity management contract with the Federal Government. Although the group has made remarkable progress in its private-sector-driven payment solutions, its top-line remained heavily skewed towards the public sector, with penchant for unreliable project timelines and commitments. There is also the operating risk of policy somersault and realignment, which could see a slowdown or reversal of essential public policies on economic payment automation and identity management. There is no guarantee of institutionalisation of public policies in Nigeria’s highly politicised public decision-making process. The deficits, created by its previous streak of losses, remained a potential threat.

    Notwithstanding, there is reasonable basis to be optimistic about the prospects of the company. The Governments, across the levels, are increasingly focused on identity management for internal security, planning and revenue generation. The automation of payment system, being driven by the Central Bank of Nigeria (CBN) and with general buy-in from major public and private stakeholders, has continued to gather momentum. It’s doubtful that there would be any major reversal in any of these directions. In all these, Chams holds competitive advantages as a stand-alone company and partner-of-choice.The company holds CBN’s licenses for mobile banking and automated payments including PoS terminal and PTSP licenses. Its partnership with the National Identity Management Commission (NIMC) is on stronger footing, and recent security events have reinforced the government’s desire on efficient identity management.

     

  • Greif Nigeria: Managing the downside

    Greif Nigeria Plc reined in internal costs and leveraged on its strong balance sheet position to minimise the adverse impact of sluggish sale on the outlook of the company last year.

    But the slowdown in top-line performance, which shaved off about N131 million in sales, still coloured the performance negative.

    Audited report and accounts of the packaging company for the year ended October 31, 2012 showed about 15 per cent decline in sales. The company subsequently reduced top-line’s cost of sales and operating expenses by about 14 per cent and 20 per cent respectively. However, the size of top-line decline overwhelmed the cost-cutting measures, drawing the bottom-line and underlying variables into negative.

    Greif Nigeria maintained keen focus on its strong balance sheet, which provided substantial cushions amidst decline in sales. With more amenable financing structure and higher liquidity; larger working capital, strong immediate financing coverage for liabilities and the absence of immediate high-interest bank loans supported the overall performance during the year.

    It distributed N12.6 million as cash dividends out of net profit after tax of N36.4 million. The retained earnings meanwhile boosted the underlying equity value in the company as net assets per share rose by 6.4 per cent.

     

    Financing structure

    Greif Nigeria’s financing structure emerged stronger in 2012 with zero financial leverage and better equity funding for operations. The proportion of equity funds to total assets improved from 52.7 per cent to 54.7 per cent. Long-term liabilities/total assets ratio increased from 32.7 per cent to 34.2 per cent while the proportion of current liabilities to total balance sheet size improved from 14.6 per cent to 11.1 per cent.

    Total assets had improved marginally by 2.4 per cent to N713.8 million in 2012 as against N696.9 million in 2011. Fixed assets declined marginally from N246.9 million to N237 million while current assets had increased by 5.9 per cent from N450.1 million to N476.8 million. Total liabilities stood at N323.3 million in 2012, a slight decrease of 2.0 per cent from N330 million recorded in 2011. While long-term liabilities grew by 7.0 per cent from N228 million to N244 million, current liabilities dropped considerably by 22 per cent from N101.9 million to N79.2 million. Paid up capital remained unchanged at N21.3 million, consisting of 42.64 million ordinary shares of 5 kobo each. Meanwhile, shareholders’ funds rose by 6.4 per cent from N367 million to N390.6 million.

     

    Efficiency

    It struggled to optimise average cost but with the absence of a strong top-line performance, average unit cost outpaced underlying value and productivity. Total cost of business inched up to 92.1 per cent of total incomes in 2012 as against 91.7 per cent recorded in 2011, underlying the marginal decline in cost efficiency and productivity.

     

    Profitability

    Greif Nigeria’s overall performance outlook was coloured by substantial decline in sales in 2012. With 15 per cent decline in sales, the company fell back on cost management to reduce the impact on the bottom-line, ending with a marginal decline of 5.2 per cent in net earnings.

    Underlying profitability ratios generally underlined the negative impact of the slowdown in sales, but they also underscored the tightening of cost management, which mitigated the top-line risk on the bottom-line. Gross profit margin stood at 17.3 per cent in 2012 as against 18.2 per cent in 2011. Pre-tax profit margin declined from 8.1 per cent to 7.5 per cent. Return on total assets slipped from 10.3 per cent to 7.9 per cent while return on equity shifted downward to 9.3 per cent as against 10.5 per cent in previous year.

    Greif Nigeria’s total sales had dropped by about 15 per cent from N879.5 million in 2011 to N748.7 million in 2012. Cost of sales declined by 14 per cent to N619.1 million as against N719.1 million in previous year. Gross profit thus slipped by 19.3 per cent from N160.5 million to N129.6 million. Distribution and administrative expenses totalled N70.5 million in 2012 as against N87.6 million in 2011, representing a drop of about 20 per cent. With marginal non-core business incomes and zero financing charges, profit before tax shrank by about 22 per cent from N71.6 million in 2011 to N56.1 million in 2012. After taxes, net profit slipped by 5.2 per cent from N38.4 million to N36.4 million.

    Earnings per share stood at 85 kobo in 2012 compared with 90 kobo in 2011. However, net assets per share improved by 6.4 per cent to N9.16 compared with N8.61 recorded in previous year. The company would be distributing 35.2 per cent of net earnings to shareholders as dividends, totalling N12.8 million. This represented a dividend per share of 30 kobo. Dividend cover stood at 2.83 times.

     

    Liquidity

    The liquidity position of the company improved considerably during the period with larger working capital, improved financial coverage and stronger immediate response to financing obligations. Current ratio, which denotes the financial agility of a company by relating current assets to current liabilities, improved to 6.02 times in 2012 as against 4.42 times in 2011. Current ratio is generally accepted as one of the measures of solvency and going concern status. Also, the proportion of working capital to total turnover improved from 39.6 per cent in 2011 to 53.1 per cent in 2012. Debtors/creditors ratio stood at 422.9 per cent as against 284.2 per cent.

     

    Governance and structures

    Greif Nigeria engages in manufacturing and marketing of metal drums, plastic containers and related flexible and rigid products and services. With three major operational locations in Nigeria, Greif Nigeria is a leader in the packaging subsector. Formerly known as Van Leer Containers Plc, Greif Nigeria Plc was incorporated in January 1940. It became a publicly quoted company in May 1979.

    Greif Nigeria is a member of Greif, a Delaware, Ohio, United States-based global packaging group with net sales of $4.27 by October 2012 and more than 200 operating locations in more than 50 countries. Greif Nigeria is owned mainly by Greif International Holdings B.V, which holds 51 per cent equity stake. The Van Leer Nigerian Education Trust holds 23 per cent while other Nigerian individuals and institutions hold 26 per cent.

    Greif Nigeria is a socially responsible corporate citizen with nearly a quarter of its net earnings dedicated to education of Nigerians through The Van Leer Nigerian Education Trust. The board and management of the company have remained stable.The company’s management and operating structures generally complied with extant code of corporate governance and best practices. It was, however, flagged the by regulatory authority for late submission of accounts.

     

    Analyst’s opinion

    Greif Nigeria needs to rework its top-line growth strategy to create headroom for profit growth and better returns. While the strong balance sheet held on admirably and cost-management efforts mitigated the impact of sluggish sales in the year under review, there is a limit to these in the event of continuing decline in sales.

    Nonetheless, it must be admitted that the performance of Greif Nigeria reflected the slowdown in manufacturing activities. Although sustained Gross Domestic Products (GDP) growth over the years has reckoned Nigeria as one of the resilient economies, the lopsided economic structure and dominance of the few hardcore sectors imply that GDP growth does not usually translate into general economic growth and development. With the crunchy reform in the banking sector, the prolonged recession at the primary capital market and generally tough operating environment, service-based companies such as Greif Nigeria, which rely on the industrial and manufacturing activities, are more susceptible to the slowdown.

    Greif Nigeria should leverage on its global network and access to mitigate domestic operating challenges. While its products – drums and closures; appear to fall within products with less industrial differentiation, it should explore further innovations in designs, convenience, durability and affordability to create a niche market for itself. The cross-country experience of the Greif global network will make this easier.

  • Mobil: Winning market, losing value

    Mobil Oil Nigeria Plc appears to be in a paradox of winning the market but losing the value. The petroleum-marketing major has reversed the decline in sales that brought its turnover to its lowest in 2010 with significant growth in sales in 2011 and last year. But profit, which had grown consecutively over the previous four years, witnessed a major reversal last year as the company struggled with high costs and poor liquidity.

    Audited report and accounts of Mobil Oil Nigeria for the year ended December 31, 2012 showed 30 per cent increase in sales but pre and post-tax profits dwindled by 32 per cent and 30 per cent respectively. The outward negative bottom-line performance underlined substantial decline in the intrinsic profit-making capacity of the oil major, a situation that was exacerbated by growing financial leverage and worsening liquidity crunch.

    Average profit per unit of sale nearly halved during the year, which also simultaneously, almost on the same scale, affected underlying returns to shareholders and other stakeholders. With 1,850 per cent increase in short-term bank loans, the gearing ratio moved from 0.5 per cent to 6.5 per cent. While the gearing ratio on the basis of overdraft remained somewhat negligible, 80 per cent increase in finance expenses to N299 million, further complicated the top-loaded cost structure of the company. These reduced basic net distributable earnings by about 41 per cent and also lowered the sustainable dividend outlook of the company, in spite of the retention of cash dividend per share at flat rate of N5 for the past two years.

    The combination of declining profitability, worsening liquidity, negative working capital, rising financial leverage and lower cost efficiency overshadowed impressive growth in sales and underlined the need for re-evaluation of the growth strategy of the oil major towards a value-driven approach.

     

    Financing structure

     

    Mobil Oil Nigeria’s paid up capital increased by 20 per cent from N150.2 million, made up of 300.5 million ordinary shares of 50 kobo each, in 2011 to N180.3 million, consisting of 360.6 million ordinary shares of 50 kobo each, in 2012. The increase was due entirely to a one-for-five bonus issue made for the 2011 business year. Shareholders’ funds meanwhile, grew by 46.5 per cent from N4.50 billion to N6.59 billion, largely due to inflow of some 37 per cent of net earnings into the reserves.

    Total assets increased slightly by 7.9 per cent from N31.11 billion to N33.56 billion. Current assets dropped by 17 per cent from N14.07 billion to N11.69 billion while long-term assets increased by 28 per cent from N17.04 billion to N21.88 billion. Total liabilities were nearly flat at N26.97 billion in 2012 as against N26.61 billion in 2011.

    The financing structure was largely stable, although increased financial leverage tempered the outlook. The proportion of equity funds to total assets improved from 14.5 per cent in 2011 to 19.6 per cent. Long-term liabilities/total assets ratio stood at 44 per cent in 2011 as against 46 per cent in 2011, while current liabilities/total assets ratio improved from 40 per cent to 37 per cent. However, the company showed increased leverage with debt-to-equity ratio of 6.5 per cent in 2012 as against 0.5 per cent in 2011.

     

    Efficiency

     

    The petroleum-marketing company obviously witnessed considerable decline in productivity and efficiency during the period, although available details were not sufficient to determine the actual unit level of productivity and overall efficiency. The ratio of total costs of business-excluding interest expenses, in relation to sales worsened to 98.1 per cent in 2012 compared with 94.2 per cent recorded in 2011, underlining further erosion in margins and returns.

     

    Profitability

     

    Mobil Oil Nigeria shows an inverse relationship between sales and profitability. While sales recorded impressive double-digit growth; profit dropped by similar rate. This rubbed off negatively on actual and underlying returns to shareholders and other stakeholders.

    Total sales peaked at N80.80 billion in 2012 as against N62.10 billion in 2011, sustaining a commendable successive growth trend. However, cost of sales outpaced sales growth with 40 per cent increase to N72.59 billion in 2012 as against N51.96 billion in 2011. This lowered gross profit by 19 from N10.14 billion to N8.21 billion. A stable total operating expense moderated the mid-line at N6.68 billion in 2012 compared with N6.52 billion in 2011. Non-core business income increased by 12 per cent from N2.55 billion to N2.85 billion. This was counterbalanced partly by 80 per cent increase in interest expense from N166 million to N299 million. Thus, profit before tax slumped to N4.1 billion as against N6 billion in previous year. After taxes, net profit for the year dwindled to N2.88 billion compared with N4.1 billion in 2011.

    Earnings analysis underlined the negative bottom-line performance. Basic earnings per share dropped from N13.58 in 2011 to N7.98 in 2012, a dip of 41 per cent. The company retained a dividend per share of N5, the same rate paid for the 2011 business year, but the 20 per cent increase occasioned by 20 per cent bonus issue for 2011 increased gross dividend from N1.50 billion to N1.80 billion. Meanwhile, net assets per share improved by 22 per cent from N14.97 to N18.28.

    Key underlying profitability and return ratios were generally lower. Gross profit margin dropped from 16.3 per cent to 10.2 per cent. Pre-tax profit margin nearly halved from 9.7 per cent to 5.0 per cent. Return on total assets dwindled from 19.3 per cent to 12.1 per cent. Return on equity halved to 43.7 per cent as against 90.8 per cent. With lower basic earnings and constant dividend, sustainable dividend outlook dimmed to 1.60 times last year as against 2.72 times in 2011.

     

    Liquidity

     

    The liquidity position of the company worsened considerably in 2012 with negative working capital and lower financing coverage for emerging financial obligations. Current ratio, which broadly indicates ability of the company to meet emerging financing needs by relating current assets to relative liabilities, slipped below generally acceptable one-for-one benchmark from 1.14 times in 2011 to 0.95 times in 2012. With reversal of positive working of N1.71 billion to –N646 million in 2012, the proportion of working capital to total sales declined from 2.8 per cent to -0.8 per cent. Debtors/creditors ratio stood at 62.1 per cent in 2012 as against 87.4 per cent in 2011.

     

    Governance and structures

     

    Mobil Oil Nigeria was incorporated as a private limited liability company in 1951 and converted to a public limited liability company in 1978. Its shares were listed on the Nigerian Stock Exchange (NSE) in 1979. Mobil Oil Nigeria is a subsidiary of Mobil Oil Corporation of the United States of America, which holds 60 per cent equity stake.

    With more than 200 retail outlets spread across the 36 states and three ultra-modern multi-purpose plants located in Apapa, Lagos State, Mobil Oil Nigeria is one of the dominant petroleum-marketing companies and it particularly holds distinction as the earliest petroleum-marketing company to be incorporated in Nigeria. It’s the second most capitalised quoted petroleum-marketing company.

    The board and management of the company remained stable. Mr Adetunji Oyebanji remains the Chairman and Chief Executive of the company. The combination of chairmanship and chief executive is contrary to the code of corporate governance for publicly listed companies, which requires separation of both positions. Besides, Mobil Oil Nigeria is well-regarded in terms of compliance and best practices.

     

    Analyst’s opinion

     

    The latest audited report underlined the difficult operating environment in the downstream sector but it also reflected the need for a careful consideration of the business strategy of Mobil Oil Nigeria. While the sales growth is commendable, and should be sustained, the company needs to realign its costs to optimise sales into tangible returns to shareholders. With relatively low margin and little product differentiation, protracted reform and many lingering often-negative controversies have been major constraints to Nigerian downstream operators. The year under review had started with a petroleum price crisis, which later snowballed into scandalous oil subsidy probe, which left most oil companies scampering to clear their names from the mess.

    Mobil Oil Nigeria needs to harness its vast potential and rise above the challenges. It may also need to consider additional capital to strengthen its balance sheet and reduce dependence on short-term high-interest loans.

     

  • Diamond Bank: Regaining form

    Diamond Bank Plc recorded a well-rounded performance in 2012 as the bank rode on the back of improved assets quality and substantial growths in incomes and underlying businesses to replace its negative bottom-line with N27.5 billion profit. Audited report and accounts of Diamond Bank for the year ended December 31, 2012 underlined remarkable turnaround in the intrinsic profit-making capacity of the bank and its expanding market share. With 35 per cent increase in gross earnings, improved cost efficiency and better credit risk management further underpinned major recovery for the bottom-line, turning away from net loss of N13.7 billion in 2011 with net profit of N22.11 billion in 2012.

    Hitherto negative profitability indices turned positive, underlining the improvements in the underlying fundamentals of the bank. While relatively higher cost of funds slightly impinged margins, improved employee productivity and midline operating cost management boosted the overall profit outlook.

    The balance sheet of the bank improved in both quantitative and qualitative terms. Total balance sheet size grew by 48 per cent and crossed the N1 trillion mark to N1.2 trillion. This was primarily driven by 51 per cent increase in customers’ deposits, which nudged N910 billion. The bank surpassed the industry’s 5.0 per cent asset quality target ratio as its proportion of non-performing loans dropped by 32 per cent in spite of 43 per cent increase in gross loans and advances. The liquidity position of the bank remained steady just as the retention of net earnings nudged shareholders’ funds by 27 per cent to about N109 billion.

    However, the bank’s expansive growth outpaced capital base and slightly undermined the capital adequacy. The bank has recognized the imperative for additional capital to support its fast-paced business growth. Besides the retention of net earnings, the bank has secured shareholders’ approval to raise $750 million, about N117 billion, in new capital issues.

     

    Capital adequacy

    Diamond Bank’s group balance sheet rose from N796.23 billion in 2011 to N1.178 trillion in 2012. Fixed assets increased by 13.4 per cent from N39.663 billion to N44.980 billion while earnings assets rose by 50 per cent from N756.57 billion to N1.133 trillion. This further untied more funds for earnings growth. The proportion of fixed assets to equity funds improved from 46 per cent in 2011 to 41 per cent in 2012. Total customer deposit jumped from N603 billion to N910 billion, pushing the liabilities base up by 50 per cent from N710.3 billion to N1.07 trillion. Group paid up capital remained unchanged at N7.238 billion, but shareholders’ funds rose by 27 per cent from N85.98 billion to N108.9 billion.

    With the aggressive business growth in 2012 outpacing capital outlay, the underlying capital adequacy dropped marginally during the year. The proportion of equity funds to total assets slipped from about 11 per cent in 2011 to 9.2 per cent in 2012. Equity funds/loans and advances ratio stood at 18.6 per cent in 2012 as against 22.2 per cent in 2011.

     

    Assets quality

    Diamond Bank showed appreciable improvement in assets quality during the year with significant decline in non-performing loans as against appreciable increase in gross loans and advances. The bank’s non-performing loans/gross loans ratio of 4.4 per cent surpassed industry target of 5.0 per cent and represented remarkable improvement on 9.2 per cent recorded in 2011. Total loans and advances rose from N427.53 billion in 2011 to N611.88 billion in 2012. Conversely, non-performing loans dropped from N39.39 billion to N26.68 billion. Net loans and advances had stood at N585.2 billion as against N388.14 billion in previous year, representing an increase of 51 per cent. Possible threats from non-performing loans to the bank reduced considerably with classified loans/equity funds ratio of 24.5 per cent in 2012 compared with 45.8 per cent in 2012.

     

    Profitability

    Diamond Bank staged major turnaround in 2012, with both outward and underlying profit and loss measures showing impressive growths. As against average pre-tax loss of 17.5 per cent on every unit of business in 2011, the bank made average pre-tax profit of 19.8 per cent in 2012. This cumulated in replacement of pre-tax loss of N17.97 billion in 2011 with pre-tax profit of N27.5 billion in 2012.

    Gross earnings increased by a third to N138.85 billion in 2012 as against N102.72 billion in 2011. The top-line was driven largely by substantial growth in core banking operations. Interest income rose by 35 per cent from N83.36 billion to N112.35 billion. Fee and commission income rose by 37 per cent from N19.36 billion to N26.5 billion. With 84 per cent increase in interest expense from N12.50 billion to N23.03 billion, net interest income rose by 26 per cent to N89.32 billion as against N70.86 billion. This also reflected in lower net interest margin, which dropped from 85 per cent to about 80 per cent. Operating expenses moderated at N42.59 billion in 2012 as against N39.74 billion in 2011. Appreciable midline cost management further boosted the bottom-line and helped the bank to break away from recent losing streak with equally impressive profit in 2012. After taxes, net profit stood at N22.11 billion in 2012 in contrast with net loss of N13.72 billion in 2011.

    Further analysis showed basic earnings per share of N1.53 2012 compared with loss per share of 95 kobo in 2011. The bank however decided to retain net earnings to support its capital base. The underlying value creation for shareholders meanwhile was evident in returns on equity and assets. Return on total assets turned around from -2.3 per cent to 2.3 per cent while return on equity improved from -16 per cent to 20.3 per cent.

    Intrinsic profitability analysis showed a generally positive outlook. The proportion of operating expenses to gross revenue improved from 39 per cent in 2011 to 31 per cent in 2012. Non-interest income slightly improved contribution to the top-line at 19 per cent in 2012 as against 18.8 per cent in 2011. Average contribution of each employee to pre-tax profit improved from –N6.5 million to N8.3 million, just as average staff cost per employee trended upward from N6 million to N7.8 million. The proportion of staff costs to gross earnings however increased from 16 per cent in 2011 to 19 per cent in 2012.

     

    Liquidity

    The liquidity position of the bank emerged stronger with larger cash and bank balances coverage for total liabilities. The proportion of cash and bank balances to total liabilities improved from 20.6 per cent to 25.4 per cent. Loans and advances/total assets ratio was steadied 50 per cent in 2012 as against 49 per cent in 2011 while loans and advances/ total deposits ratio closed 2012 at 64.3 per cent compared with 64.4 per cent in 2011.

     

    Governance & structures

    Diamond Bank was incorporated as a private limited liability company in 1991. It transformed into a public limited liability company and listed its shares on the Nigerian Stock Exchange (NSE) in 2005.

     

    Analyst’s opinion

    Diamond Bank shows a commendable growth trajectory that reassures on the resilience of the bank’s growth strategy. With the decision to focus on core commercial banking, and as such divest from non-core banking businesses, the bank appears to be in better stead to consolidate profitability. While it needs to open up lending to strengthen profitability, its cautious risks assessment and aggressive business growth strategy would provide relative stability as it ventures out to explore greater risk-return potential. Additional capital would support the bank’s growth potential.

  • Nestle Nigeria: Getting better

    Nestle Nigeria combined appreciable growth in sales with more efficient cost management and substantial deleverage of its balance sheet to deliver its most impressive results in recent years. Audited report and accounts of Nestle Nigeria for the year ended December 31, 2012 showed that significant reduction in financing charges and improved cost management accentuated top-line growth. Total sales grew by 19 per cent but pre and post tax profits rose by 38 per cent and 28 per cent respectively.

    With 28 per cent increase in net earnings per share, the board of the food and beverage multinational has recommended increase in cash payout by 59 per cent. The company is distributing about 75 per cent of net earnings for the year, gradually moving back to Nestle Nigeria’s traditional payout policy of almost distributing net earnings to shareholders. Besides, net assets improved by 47 per cent, underlying increase in equity funds due to improving retained earnings.

    The balance sheet position of the company emerged stronger with better financial structure and improved liquidity.

    Financing structure

    With zero immediate gearing ratio, the proportion of equity funds to total assets improved from 30 per cent to 38 per cent. The proportion of long-term liabilities to total assets dropped from 38 per cent to 33 per cent while current liabilities amounted to 28 per cent of total balance sheet size in 2012 as against about 32 per cent in 2011.

    Nestle Nigeria’s total assets increased by 14.5 per cent from N77.73 billion in 2011 to N88.96 billion in 2012. Long-term assets had increased by about 13 per cent from N55.5 billion to N62.61 billion. Current assets rose by 19 per cent to N26.36 billion as against N22.21 billion in previous year. Total liabilities remained almost flat at N54.78 billion in 2012 compared with N54.52 billion in 2011. Current liabilities stood at N25.18 billion as against N24.82 billion while long-term liabilities slipped from N29.70 billion to N29.60 billion. Paid up share capital remained unchanged at N396 million. Shareholders’ funds meanwhile grew by 47.3 per cent from N23.21 billion in 2011 to N34.19 billion in 2012.

     

    Efficiency

    Average number of employees increased marginally from 2,168 persons in 2011 to 2,179 persons in 2012. The company’s cost efficiency improved during the year as the company reined in relative cost of sales. Average cost of sale per unit of sale decreased in 2012, providing early headroom for profit growth. While average cost per staff increased from N5.21 million in 2011 to N6.08 million in 2012, average contribution of each employee to pre-tax profit improved from N8.39 million to N11.50 million.

    Overall outlook suggests improved productivity alongside the improvement in cost efficiency. Total cost of business, excluding finance charges, dropped slightly from 78 per cent in 2011 to 77.7 per cent in 2012.

     

    Profitability

    Nestle Nigeria recorded appreciable improvements in both underlying and actual profit and loss items. Substantial growths in sales and profit translated into equally significant increase in cash distributions to shareholders. The congruence between outward profit and loss items and key indices indicated a major rebound for a company that had struggled with higher costs and declining margins in the previous year.

    Total turnover rose by 19 per cent from N97.96 billion to N116.71 billion. Cost of sales increased by 16 per cent from N57.37 billion to N66.54 billion, providing impetus for 46 percent increase in gross profit from N40.59 billion to N59.17 billion. Total operating expenses however rose by 27 per cent from N19.08 billion to N24.18 billion. With about 72 per cent reduction in interest expenses from N3.32 billion to N939 million in 2012, profit before tax rose by 38 per cent from N18.2 billion to N25.05 billion. After taxes, net profit increased by 28 per cent from N2.08 billion to N2.67 billion.

    Earnings per share stood at N26.67 in 2012, representing an increase of 28 per cent on N20.81 recorded in 2011. Gross dividend increased by 59 per cent from N9.95 billion for 2011 to N15.85 billion for 2012, representing dividend per share of N20 for 2012 as against N12.55 distributed for 2011. Net assets per share also improved by 47 per cent from N29.28 to N43.13.

    Beyond the surface, underlying profitability indices improved considerably. Gross profit margin increased from 41 per cent to 51 per cent. Profit before tax margin also improved from 18.6 per cent to 21.5 per cent. Return on total assets stood at 28.2 per cent in 2012 as against 23.4 per cent in 2011. Return on equity however dropped from 71 per cent in 2011 to 62 per cent in 2012. Sustainable dividend outlook diminished slightly with a dividend cover of 1.3 times in 2012 as against 1.7 times in 2011.

    Segmental analysis showed growths across the two business segments. Turnover in the food business improved from N60.73 billion to N70.4 billion while profit in the segment increased from N13.40 billion to N16.05 billion. Sales in the beverage segment also improved from N37.23 billion to N46.31 billion. Profit before tax within the segment stood at N10.04 billion in 2012 as against N8.22 billion in 2011.

     

    Liquidity

    Nestle Nigeria emerged with stronger liquidity, signposted by positive working capital and better financial coverage for immediate liabilities. Current ratio, which measures the financial agility of a company by relating current assets to relative liabilities, improved from 0.90 times in 2011 to 1.05 times in 2012. Working capital/turnover ratio stood at 1.0 per cent in 2012 as against negative rate of 2.7 per cent in 2011. Debtors/creditors ratio stood at 70.8 per cent in 2012 compared with 76.1 per cent in 2011.

     

    Governance and structures

    Nestle Nigeria is a member of the Nestle Group, which holds about 62.76 per cent equity stake mainly through its Ghana-incorporated Nestle CWA Limited. There were no major changes in the board and management of the company. Chief Olusegun Osunkeye still chairs the board while Mr. Martin Woolnough, an Austrian, directs the executive management team. Nestle Nigeria subscribes to many international codes as well as Nigerian code of corporate governance for public companies. The annual report also contained corporate governance report detailing key principles, methodologies and actions. The highest-priced stock at the Nigerian stock market, Nestle Nigeria has also been hailed severally as the icon of good corporate governance. It has usually been the first quoted company to submit its audited report and accounts well ahead of due date and its forecasts are mostly reliable.

     

    Analyst’s opinion

    The latest report underlined the benefits from recent expansions, which have continued to stimulate the top-line performance of the company. With efficient cost management strategy, the company emerged with better profitability. Balance sheet restructuring, with attendant reduction in financing charges, had removed a major snag that had undermined the overall return outlook in previous years.

    The company appears to have found the right mix. Stable cost management strategy, deleveraged balance sheet and aggressive sales growth strategy should provide impetus for future growth. The company should remain focused on this three-prong strategy. Against the background of its market valuation, which had moved closer to historic six-digit level, Nestle Nigeria needs to justify investors’ confidence with higher earnings and dividend yields. Overall, there is reasonable basis to assume that the company would sustain its positive performance outlook.

  • Forte Oil: Getting back on stream?

    For the first time in four years, Forte Oil Plc returned to profitability. From a N20 billion net loss in 2011, the company recorded a modest profit of N1.01 billion in 2012.

    Audited report and accounts of Forte Oil for the year ended December 31, 2012 highlighted the increasingly efficient cost management and realignment of core business operations, though the immediate restrain further weighed on the top-line. While turnover dropped by 22 per cent, actual and underlying profitability recorded most in recent years.

    Management’s tight control on sales and operating costs underpinned a turnaround, which trickled from the top to the bottom-line. Cost of sales dropped by 25 per cent and reversed the sustained decline in gross profit. Gross profit rebounded with an increase of 16 per cent in 2012 as against declines of 28.2 per cent and 8.1 per cent in 2011 and 2010. Operating expenses, including distribution and administration expenses, also dropped by 72 per cent. This further moderated decline in non-core business income and increase in finance expenses. These top-down cost managements boosted the bottom-line.

    Average gross profit margin improved from 7.5 per cent in 2011 to 11.2 per cent in 2012. As against average pre-tax loss of 17.1 per cent on every unit of sale in 2011, Forte Oil made a modest profit of 1.3 per cent in 2012. The improvement in profitability also changed underlying returns from negative to positive just as the intrinsic value of the downstream company improved considerably.

    However, the company’s balance sheet showed a mixed outlook, with less liquidity and higher financial leverage counterbalanced by improved equity/total assets ratio. Its negative working capital also underlines the challenge for continuing recovery.

     

    Financing structure

    Forte Oil’s paid up share capital remained unchanged at N540 million, consisting of 1.08 billion ordinary shares of 50 kobo each. Shareholders’ funds rode on the back of increased profitability and retained earnings to N7.58 billion, representing an increase of 29 per cent on N5.89 billion recorded in 2011.Total assets stood at N42.51 billion in 2012 as against N45.23 billion in 2011. Total long-term assets increased by 16 per cent from N15.28 billion to N17.79 billion to counterbalance almost similar decline in current assets from N29.94 billion to N24.72 billion.

    On the other side, total liabilities dropped by 11 per cent from N39.34 billion to N34.93 billion. Current liabilities stood at N34.58 billion as against 38.21 billion. Long term liabilities dropped from N1.12 billion to N347 million.

    Equity funds provided stronger supports at 18 per cent of total assets in 2012 as against 13 per cent in 2011. The proportion of current liabilities to total assets stood at 81 per cent in 2012 compared with about 85 per cent in 2011. The proportion of short-term bank loans to equity funds, however, trended upward to 130 per cent as against 108 per cent, underlining consideration for equity recapitalisation.

     

    Efficiency

    Average cost efficiency improved during the year as the company reined in relative cost of sales and operating expenses. Average cost of sale per unit of sale decreased in 2012, providing early headroom for profit growth. Overall outlook suggests improved productivity alongside the improvement in cost efficiency. However, there were no data to determine actual productivity level in relation to average cost per human capital. Total cost of business, excluding finance charges, improved commendably from 117 per cent in 2011 to 97.5 per cent in 2012.

     

    Profitability

    Forte Oil recorded its first profit in four years in 2012 as improved cost management enhanced the profit-making capacity of the downstream company. Underlying profitability indices firmed up to highest levels in recent years, which also catalysed the rebound of the outward profit and loss items. Gross profit margin improved from 7.5 per cent in 2011 to 11.2 per cent. Average pre-tax profit margin turned round from -17.1 per cent to 1.3 per cent. The positive bottom-line also reflected on the underlining returns. Average return on total assets recovered from negative 44.1 per cent to a positive of 2.7 per cent. Return on equity improved remarkably from -331.7 per cent to 13.3 per cent.

    Forte Oil made profit before tax of N1.15 billion in 2012, a major recovery from pre-tax loss of N19.95 billion in 2011. As against net loss of N19.54 billion in 2011, the company bounced back with net profit after tax of N1.01 billion. It had wallowed in the red with net loss of N2.7 billion and N9.2 billion in 2010 and 2009 respectively. On the average, shareholders earned 93 kobo on every ordinary share of 50 kobo each in 2012 as against a whooping loss of N18.09 per share recorded in 2011. The intrinsic worth of the shareholders’ value improved by about 29 per cent with net assets per share of N7.02 in 2012 as against N5.45 in previous year. Total sales stood at N90.98 billion in 2012 compared with N117 billion in 2011. Cost of sales dropped by 25 per cent from N108.27 billion to N80.84 billion. This nudged gross profit by 16 per cent from N8.73 billion to N10.15 billion.

    Midline costs declined considerably in 2012. Distribution expenses halved from N5.84 billion to N2.87 billion. Administrative expenses dropped by 63.7 per cent to N5.01 billion in 2012 as against N13.81 billion in 2011. Total operating expenses also declined by 72 per cent from N28.36 billion to N7.89 billion. Non-core business income dropped by 43.5 per cent from N1.08 billion to N611 million. Finance expenses also increased by 23 per cent from N1.40 billion to N1.72 billion.

    In spite of the net profit, the board of the company has however, not recommended any dividend payment, meaning that shareholders still have a long wait.

     

    Liquidity

    Forte Oil’s liquidity position appeared stable, although its negative working capital still coloured the overall liquidity outlook. Current ratio, which measures the financial agility of a company by relating current assets to relative liabilities, stood at 0.71 times in 2012 as against 0.78 times in 2011. Working capital/turnover ratio stood at -10.8 per cent in 2012 as against -7.1 per cent in 2011. Debtors/creditors ratio closed 2012 at 58.4 per cent compared with 71.4 per cent in 2011.

     

    Governance and structures

    Forte Oil, formerly known as African Petroleum (AP), is a major downstream company quoted on the Nigerian Stock Exchange (NSE). The Forte Oil Group includes a foreign subsidiary, AP Oil and Gas Ghana Limited (APOG), which operates some eight retail outlets in Ghana and an indigenous upstream services company, AP Oilfields Services Limited (APOS). Forte Oil has more than 500 retail outlets spread across the country, a fuel storage facility at Apapa and aviation joint users hydrant in Ikeja, Lagos. It also operates another large storage depot at Onne, Rivers State as well as joint aviation depots in Abuja, Port Harcourt and Kano. With 1.08 billion ordinary shares of 50 kobo each, Forte Oil currently has market capitalisation of N15.3 billion.

    The board and management of the company remain stable. Mr Olufemi Otedola, the core investor in the company, chairs the group’s board of directors while Mr Akin Akinfemiwa leads the executive management team as group chief executive officer. On the basis of available information, the company has largely complied with extant codes of corporate governance and best practices.

     

    Analyst’s opinion

    The overall outlook for Forte Oil is a bit encouraging, especially against the background of the chequered history of the company. The success factors have been management’s intensive cost control and realignment strategies. It needs to sustain these while building on the top-line to create headroom for sustained profit growth. The 2012 results could serve as the foundation, upon which the company could rally all stakeholders to irreversible path of recovery. With the completion of the restructuring of its business and subsequent transformation into a lean and more efficient technology-driven company, aggressive business drives in the downstream and upstream sectors should coagulate into stronger platform for future growth.

    It, however, still needs to be conscious of the red flags- its high financial leverage and related financing expenses, fragile balance sheet structure and sales volume growth. As future profitability reinforces investors’ confidence, Forte Oil needs to consider readjusting its equity-loan balance through additional equity funds. While the oil and gas sector is plagued with several extenuating global and domestic factors, including its deformed deregulation, which could moderate performance, there is reasonable basis to assume stable outlook for the company.

     

  • Cadbury Nigeria: Steady performance

    Cadbury Nigeria Plc leveraged on economy of scale and tightened cost management in 2012 to cushion the adverse impact of a sluggish top-line, strengthening further performance outlook of the food and beverages company. After six years of non-declaration of any dividend, Cadbury Nigeria signall ed full recovery from the hangovers of its 2006 accounting scandal with the recommendation for distribution of about N1.6 billion to shareholders as cash dividends for the 2012 business year.

    Audited report and accounts of Cadbury Nigeria for the year ended December 31, 2012 showed marginal decline in sales, but improved cost and financing management squeezed out more profit than the previous year. Although tax provisions impinged on net earnings, underlying profitability ratios generally showed stronger performance.

    The company’s balance sheet indicated better financing and liquidity positions, which supported the overall performance outlook. With lower gearing ratio, improved liquidity, higher working capital and increased proportionate contribution of equity funds to total assets, amenable balance sheet structure moderated midline constraints that could have resulted from the lull in sales.

     

    Financing structure

    Total assets increased by 19 per cent to N40.16 billion in 2012 as against N33.66 billion in 2011. Non-current assets had increased marginally from N13.43 billion to N13.99 billion while current assets rose by 29 per cent from N20.23 billion to N26.17 billion. On the other hand, total liabilities rose by 18 per cent from N17.07 billion to N20.12 billion. While long-term liabilities steadied at about N3.2 billion, current liabilities increased by 22 per cent from N13.88 billion to N16.91 billion. The company’s paid up share capital remained unchanged at about N1.57 billion, consisting of about 3.13 billion ordinary shares of 50 kobo each. With about 55 per cent of net earnings flowed into the reserves, shareholders’ funds improved by 21 per cent to N20.04 billion compared with N16.59 billion recorded in the previous year.

    The underlying financing structure improved slightly in 2012. The proportion of equity funds to total assets inched up to 50 per cent in 2012 as against 49 per cent in 2011. Debt-to-equity ratio improved from 9.0 per cent to 7.5 per cent. However, current liabilities/total assets ratio stood at 42 per cent in 2012 as against 41 per cent in 2011. Long-term liabilities/total assets closed 2012 at 8.0 per cent as against 9.5 per cent in 2011.

     

    Efficiency

    Overall outlook appeared to suggest steady productivity and cost efficiency in 2012. Although there were no available data to determine actual unit cost per productive output at the press time, available extracts indicated little negative variance. Total cost of business, excluding financing charges, stood at 88.4 per cent of total sales in 2012, almost flat with 88.0 per cent recorded in 2011.

     

    Profitability

    The profit and loss performance showed a mixed-grill in 2012 as sluggish sales weighed in on overall performance. While the lull in sales constrained opportunity for wider profit growth, the company fell on cost and finance management to mitigate decline and steady the bottom-line. These played out variously in the outward profit and loss items and the underlying profitability ratios. While sales, gross profit and trading profit dipped to lower levels, gross profit margin and pre-tax profit margin showed improved cost efficiency and profitability.

    Gross profit margin inched up to 33.1 per cent in 2012 as against N32.7 per cent in 2011. Profit before tax margin also improved modestly from 14.8 per cent to 16.4 per cent. Both indices indicated that the company witnessed improvement in average profit per unit of sales, in spite of the decline in actual figures.

    Total sales dropped marginally by 1.6 per cent from N34.11 billion to N33.55 billion. Cost of sales also slumped to N22.45 billion from N22.95 billion. Gross profit flattened to N11.10 billion in 2012 as against 11.16 billion in 2011. Total operating expenses stood at N7.21 billion, some 1.8 per cent above N7.08 billion recorded in 2011. Trading profit thus dropped from N4.08 billion to N3.89 billion. With 67 per cent increase in non-core business income from N971 million to N1.62 billion, profit before tax heaved upward to N5.51 billion in 2012 compared with N5.05 billion in 2011. However, increase in tax provisions reversed net profit after tax by 5.9 per cent to N3.46 billion as against N3.67 billion in previous year.

    Per share analysis indicated earnings per share of N1.10 in 2012, a slight decrease from N1.17 recorded in 2012. The board of the company has recommended the distribution of some 45 per cent of net earnings as cash dividends to shareholders. Gross dividend of N1.57 billion would be distributed on the basis of 50 kobo per every ordinary share of 50 kobo each. Though current earnings yield and dividend yield appear relatively low, the recommendation suggests a recovery and represents substantial yield for long-term investors, such as those that picked up their rights during the last supplementary issue. Net assets per share also increased by 21 per cent from N5.30 to N6.40. The dividend cover of 2.20 times also represents substantial future payment potential. Underlying returns were however, generally lower. Return on total assets dropped from 15 per cent to 13.7 per cent while return on equity slipped from 22.1 per cent to 17.2 per cent.

     

    Liquidity

    The liquidity position of the company improved considerably during the period. Current ratio, which indicates the potential ability of the company to meet emerging liabilities, strengthened to 1.55 times in 2012 compared with 1.46 times in 2011. The proportion of working capital to sales also improved from 18.6 per cent to 27.6 per cent. Debtors/creditors ratio stood at 42.5 per cent as against 43.3 per cent.

     

    Governance and structures

    Incorporated in January 1965, Cadbury Nigeria Plc became a publicly quoted company in 1976. Mondelçz International, a global snacks company, holds the majority equity stake of 74.99 per cent in Cadbury Nigeria while thousands of Nigerian individual and institutional shareholders hold the remaining 25.01 per cent. The dogged foreign investors had increased its equity stake through acquisition of additional rights’ shares, which were not picked up by the Nigerian investors during the trying period of the food and beverages company. Mondelçz International has operations in 165 countries with total revenue of $35 billion in 2012. Mondelçz is listed in the Standard and Poor’s 500, NASDAQ 100 and Dow Jones Sustainability Index.

    The board and management of the company remained stable. Mr Atedo Peterside still chairs the board. Mr Emil Moskofian replaced Mr Alan Palmer as the managing director. Cadbury Nigeria complied with codes of corporate governance and best practices during the review period.

     

    Analyst’s opinion

    The board and management of Cadbury Nigeria clearly have their challenge cut out for them-to unfrozen the top-line while sustaining efficient cost management. The performance in 2012 still showed resilience and the company appeared to be in good stead to surmount the headline problem. With a relatively strong balance sheet, streamlined business that focused on optimal return and recent horizontal and vertical integrations, the intrinsic potential, just like the underlying profitability, tends to outweigh the negative. Besides jumpstarting sales, the recent absorption of its less-optimal subsidiary-Stanmark Cocoa Processing Company Limited and continuing integration of Cadbury Nigeria as the hub for Mondelez International’s African operations are expected to be catalysts for significant growths in the years ahead. Fast moving consumer goods multinationals tend to shadow one another in terms of investments and growth plans, and Cadbury Nigeria may witness further expansion in line with the competitive trend. Overall, there are reasonable basis to assume that Cadbury Nigeria may sustain its recovery.

     

  • Greif Nigeria: On the balance

    Greif Nigeria Plc struggled with declining sales in 2012 and its cost-cutting strategy could not contain the negative impact on the bottom-line. Considerable decline in sales impinged on actual and underlying profitability, leaving the company with marginal declines in distributable earnings and returns. Audited report and accounts for the year ended October 31, 2012 showed that sales dropped by 15 per cent, which magnified to about 22 per cent dip in pre-tax profit. However, with lower tax provisions, profit after tax ended with marginal decline of 5.2 per cent. These also reflected in underlying profitability indices, which all through slipped to lower levels.

    However, the packaging company emerged with stronger balance sheet with more congruent financing structure and higher liquidity providing supports and cushions against the challenges in market operations. With zero financial leverage and current ratio of 6.02 times, Greif Nigeria’s balance sheet obviously curtailed extraneous variables that could have worsened the overall performance during the year. The board remained conservative in its dividend policy, opting to distribute a little above one-third of net earnings to shareholders. The result was a modest dividend yield of about 2.4 per cent.

     

    Financing structure

    Greif Nigeria’s paid up capital remained unchanged at N21.3 million, consisting of 42.64 million ordinary shares of 5 kobo each. Shareholders’ funds inched up by 6.4 per cent from N367 million to N390.6 million. Total assets increased slightly by 2.4 per cent to N713.8 million in 2012 as against N696.9 million in 2011. Fixed assets declined marginally from N246.9 million to N237 million while current assets had increased by 5.9 per cent from N450.1 million to N476.8 million. Total liabilities stood at N323.3 million in 2012, a slight decrease of 2.0 per cent from N330 million recorded in 2011. While long-term liabilities grew by 7.0 per cent from N228 million to N244 million, current liabilities dropped considerably by 22 per cent from N101.9 million to N79.2 million.

    The underlying financing structure was stronger in 2012 with zero gearing ratio and more equity funds. The proportion of equity funds to total assets improved from 52.7 per cent to 54.7 per cent. Long-term liabilities/total assets ratio increased from 32.7 per cent to 34.2 per cent while the proportion of current liabilities to total balance sheet size improved from 14.6 per cent to 11.1 per cent.

     

    Efficiency

    The company’s cost slightly outpaced output, impinging on margins. Although there were no available data to determine actual unit decline in productivity and cost efficiency, the overall outlook suggested marginal declines in productivity and efficiency. Total cost of business inched up to 92.1 per cent of total incomes in 2012 as against 91.7 per cent recorded in 2011.

     

    Profitability

    Greif Nigeria struggled with sluggish top-line, which reverberated all through the bottom-line. Total turnover dropped by about 15 per cent from N879.5 million in 2011 to N748.7 million in 2012. Cost of sales declined by 14 per cent to N619.1 million as against N719.1 million in previous year. Gross profit consequently shrank by 19.3 per cent from N160.5 million to N129.6 million. Distribution and administrative expenses totalled N70.5 million in 2012 as against N87.6 million in 2011, representing a drop of about 20 per cent. With marginal non-core business incomes and zero financing charges, profit before tax shrank by about 22 per cent from N71.6 million in 2011 to N56.1 million in 2012. After taxes, net profit slipped by 5.2 per cent from N38.4 million to N36.4 million.

    Underlying profitability ratios were generally negative. Gross profit margin declined from 18.2 per cent to 17.3 per cent. Pre-tax profit margin also dwindled from 8.1 per cent to 7.5 per cent. Return on total assets slipped from 10.3 per cent to 7.9 per cent while return on equity shifted downward to 9.3 per cent as against 10.5 per cent in previous year.

    Further analysis showed earnings per share of 85 kobo in 2012 compared with 90 kobo in 2011. However, net assets per share improved by 6.4 per cent to N9.16 compared with N8.61 recorded in previous year. The company would be distributing 35.2 per cent of net earnings to shareholders as dividends, totalling N12.8 million. This represented a dividend per share of 30 kobo. Dividend cover stood at 2.83 times. At current market price, the dividend implies a yield of 2.37 per cent.

     

    Liquidity

    The liquidity position of the company improved considerably during the period. Current ratio, which underlines financial readiness of the company and serves as measure of solvency, closed 2012 better at 6.02 times as against 4.42 times in 2011. Working capital/turnover ratio improved from 39.6 per cent to 53.1 per cent. Debtors/creditors ratio stood at 422.9 per cent as against 284.2 per cent.

     

    Governance and

    structures

    Formerly known as Van Leer Containers Plc, Greif Nigeria Plc was incorporated in January 1940. It became a publicly quoted company in May 1979. The highest-priced stock in the packaging and containers subsector, Greif Nigeria is into manufacturing and marketing of metal drums and plastic containers. A member of global packaging group with net sales of $4.27 billion in October 2012 and more than 200 operating locations in more than 50 countries, Greif Nigeria is owned mainly by Greif International Holdings B.V, which holds 51 per cent equity stake. The Van Leer Nigerian Education Trust holds 23 per cent while other Nigerian individuals and institutions hold 26 per cent. Greif Nigeria is a socially responsible corporate citizen with nearly a quarter of its net earnings dedicated to education of Nigerians through The Van Leer Nigerian Education Trust. The board and management of the company have remained stable. The company has complied largely with code of corporate governance and extant laws. It however, was in breach of the submission of accounts deadline.

     

    Analyst’s opinion

    The performance of Greif Nigeria reflected the general slowdown in manufacturing activities. Although sustained Gross Domestic Products (GDP) growth over the years has reckoned Nigeria as one of the resilient economies, the lopsided economic structure and dominance of the few hardcore sectors imply that the Gross Domestic Product (GDP) growth does not usually translate into general economic growth and development. With the crunchy reform in the banking sector, the prolonged recession at the primary capital market and generally tough operating environment, service-based companies such as Greif Nigeria, which rely on the industrial and manufacturing activities, are more susceptible to the slowdown. The company needs to rework its top-line growth strategy t create headroom to energise profit and returns. There is also the need to align operations with costs, to ensure that shareholders derive optimal value from operations.

  • Nestle Nigeria: Improving fundamentals

    Nestle Nigeria: Improving fundamentals

    Nestle Nigeria Plc showed a well-rounded performance with stronger underlying fundamentals impacting on actual earnings and returns. Nestle Nigeria combined appreciable growth in sales with more efficient cost management and substantial deleverage of its balance sheet to deliver its most impressive results in recent years.

    Audited report and accounts of Nestle Nigeria for the year ended December 31, 2012 showed significant reduction in financing charges and improved cost management accentuated top-line growth. Total sales grew by 19 per cent but pre and post tax profits rose by 38 per cent and 28 per cent respectively.

    With 28 per cent increase in net earnings per share, the board of the food and beverage multinational has recommended increase in cash payout by 59 per cent. The company is distributing about 75 per cent of net earnings for the year, gradually moving back to Nestle Nigeria’s traditional payout policy of almost distributing net earnings to shareholders. Besides, net assets improved by 47 per cent, underlying increase in equity funds due to improving retained earnings.

    The balance sheet position of the company emerged stronger with better financial structure and improved liquidity.

    Financing structure

    Nestle Nigeria’s total assets increased by 14.5 per cent from N77.73 billion in 2011 to N88.96 billion in 2012. Long-term assets had increased by about 13 per cent from N55.5 billion to N62.61 billion. Current assets rose by 19 per cent to N26.36 billion as against N22.21 billion in previous year. Total liabilities remained almost flat at N54.78 billion in 2012 compared with N54.52 billion in 2011. Current liabilities stood at N25.18 billion as against N24.82 billion while long-term liabilities slipped from N29.70 billion to N29.60 billion. Paid up share capital remained unchanged at N396 million while shareholders’ funds grew by 47.3 per cent from N23.21 billion in 2011 to N34.19 billion last year.

    With zero immediate gearing ratio, the proportion of equity funds to total assets improved from 30 per cent to 38 per cent. The proportion of long-term liabilities to total assets dropped from 38 per cent to 33 per cent while current liabilities amounted to 28 per cent of total balance sheet size in 2012 as against about 32 per cent in 2011.

    Efficiency

    Average cost efficiency improved during the year as the company reined in relative cost of sales. Average cost of sale per unit of sale decreased in 2012, providing early headroom for profit growth. Overall outlook suggests improved productivity alongside the improvement in cost efficiency. However, there were no data to determine actual productivity level in relation to average cost per human capital. Total cost of business, excluding finance charges, dropped slightly from 78 per cent in 2011 to 77.7 per cent in 2012.

    Profitability

    Nestle Nigeria recorded appreciable improvements in both underlying and actual profit and loss items. Substantial growths in sales and profit translated into equally significant increase in cash distributions to shareholders. The congruence between outward profit and loss items and key indices indicated a major rebound for a company that had struggled with higher costs and declining margins in the previous year.

    Total turnover rose by 19 per cent from N97.96 billion to N116.71 billion. Cost of sales increased by 16 per cent from N57.37 billion to N66.54 billion, providing impetus for 46 per cent increase in gross profit from N40.59 billion to N59.17 billion. Total operating expenses however rose by 27 per cent from N19.08 billion to N24.18 billion. With about 72 per cent reduction in interest expenses from N3.32 billion to N939 million in 2012, profit before tax rose by 38 per cent from N18.2 billion to N25.05 billion. After taxes, net profit increased by 28 per cent from N2.08 billion to N2.67 billion.

    Earnings per share stood at N26.67 in 2012, representing an increase of 28 per cent on N20.81 recorded in 2011. Gross dividend increased by 59 per cent from N9.95 billion for 2011 to N15.85 billion for 2012, representing dividend per share of N20 for 2012 as against N12.55 distributed for 2011. Net assets per share also improved by 47 per cent from N29.28 to N43.13.

    Beyond the surface, underlying profitability indices improved considerably. Gross profit margin increased from 41 per cent to 51 per cent. Profit before tax margin also improved from 18.6 per cent to 21.5 per cent. Return on total assets stood at 28.2 per cent in 2012 as against 23.4 per cent in 2011. Return on equity however dropped from 71 per cent in 2011 to 62 per cent in 2012. Sustainable dividend outlook diminished slightly with a dividend cover of 1.3 times in 2012 as against 1.7 times in 2011.

    Liquidity

    Nestle Nigeria emerged with stronger liquidity, signposted by positive working capital and better financial coverage for immediate liabilities. Current ratio, which measures the financial agility of a company by relating current assets to relative liabilities, improved from 0.90 times in 2011 to 1.05 times in 2012. Working capital/turnover ratio stood at one per cent in 2012 as against negative rate of 2.7 per cent in 2011. Debtors/creditors ratio stood at 70.8 per cent in 2012 compared with 76.1 per cent in 2011.

    Governance and structures

    Nestle Nigeria is a member of the Nestle Group, which holds about 62.76 per cent equity stake mainly through its Ghana-incorporated Nestle CWA Limited. There were no major changes in the board and management of the company. Chief Olusegun Osunkeye still chairs the board while Mr Martin Woolnough, an Austrian, directs the executive management team. Nestle Nigeria subscribes to many international codes as well as Nigerian code of corporate governance for public companies. The annual report also contained corporate governance report detailing key principles, methodologies and actions. The highest-priced stock at the Nigerian stock market, Nestle Nigeria has also been hailed several times as the icon of good corporate governance. It has usually been the first quoted company to submit its audited report and accounts well ahead of due date and its forecasts are mostly reliable.

    Analyst’s opinion

    The performance of Nestle Nigeria is commendable. Recent expansions have continued to stimulate the top-line while increasingly efficient cost management strategy appeared to be providing additional impetus. Balance sheet restructuring, with attendant reduction in financing charges, had removed a major snag that had undermined the overall return outlook in previous years.

    The company appears to have found the right mix. Stable cost management strategy, deleveraged balance sheet and aggressive sales growth strategy should provide impetus for future growth. The company should remain focused on this three-prong strategy. Against the background of its market valuation, which had moved closer to historic six-digit level, Nestle Nigeria needs to justify investors’ confidence with higher earnings and dividend yields.

    Overall, there is reasonable basis to assume that the company would sustain its positive performance outlook.