The Nation Newspaper

Category: Due Diligence

  • Red Star Express: Modest gains, tough margins

    Red Star Express: Modest gains, tough margins

    Red Star Express Plc witnessed modest gains in key profit and loss items in 2012 but cost pressures thinned out margins, leaving the courier and logistic company with relatively subdued bottom-line. Latest operational report for the period ended September 30, 2012 showed single-digit growth in sales and profit, but the company’s net earnings remain substantial to sustain previous cash payout trend. The second quarter report however indicated flat margin, replicating the performance trend in the immediate past audited year.

    Audited report and accounts of Red Star Express for the year ended March 31, 2012 had indicated improvement in the underlying profit-making capacity of the courier and logistics company with about three percentage points in average profit per unit of sales. With relatively high operational costs, the company fell on internal cost management to improve profitability. However, 303 per cent increase in taxes reduced net earnings. Although the company’s zero financial leverage remained supportive of the profit and loss accounts but marginal declines in the liquidity position and proportionate equity funds impinged on the balance sheet position.

    Notwithstanding, the company sustained its cash payout rate of 30 kobo per share, although reduction in net earnings affected long-time dividend sustainability.

    With earnings per share of about 31 kobo by the second quarter, the company appeared in better stead to sustain dividend trend. Gross profit margin slipped to 28.55 per cent by September 2012 as against 30.19 per cent in comparable period of 2011 while profit before tax margin was flat at 10 per cent.

    Financing structure

     

    Red Star Express’s paid up share capital remained unchanged at N294.7 million but shareholders’ funds increased by 10.5 per cent from N1.44 billion in 2011 to N1.59 billion. Total assets also improved by 13.5 per cent to N3.14 billion in 2012 as against N2.77 billion in 2011. Current assets rose by 23 per cent from N1.87 billion to N2.3 billion while permanent assets had declined marginally from N896 million in 2011 to N845 million. With zero bank borrowing, equity funds amounted to 51 per cent of total assets in 2012 as against 52 per cent in 2011. Long-term liabilities/total assets ratio slipped from 14 per cent to 12 per cent while current liabilities/total assets ratio weakened from 34 per cent to 37 per cent.

    Efficiency

    The company showed better cost management and efficiency. Improved midline cost management mitigated overall cost profile, as total cost of business declined to 88 per cent of total sales in 2012 as against about 92 per cent in 2011. While average pre-tax profit per staff was N0.43 million on average staff cost per head of N1.06 million in 2011, there were no definitive details to determine the average productivity level per person in the immediate past year.

     

    Profitability

     

    Interim report for the six-month ended September 30, 2012 showed that turnover rose by 8.6 per cent from N2.39 billion in 2011 to N2.60 billion in 2012. Gross profit inched up by 2.8 per cent from N722.06 million to N742.4 million. Profit before tax stood at N260.27 million in September 2012 as against N239.62 million in corresponding period of 2011. Profit after tax increased from N167.71 million to N182.19 million, indicating modest increase of 8.6 per cent.

    The full-year report ended March 31, 2012 showed that Red Star Express grew sales by about 20 per cent in 2012 but profit after tax dipped by 1.9 per cent. Total turnover rose from N4.21 billion in 2011 to N5.03 billion in 2012. Cost of sales however increased by 21 per cent to N3.38 billion as against N2.79 billion. Gross profit stood at N1.65 billion compared with N1.41 billion, representing an increase of 16.6 per cent. Operating expenses remained flat at N1.059 billion in 2012 as against N1.06 billion in 2011. Non-core business income dropped by 13 per cent from N58 million to N50 million.

    With these, profit before tax rose by 56 per cent from N411 million in 2011 to N640 million in 2012. However, significant increase in tax provisions from N77.71 million in 2011 to N313.14 million in 2012 depressed net earnings to N327 million compared with N334 million in previous year.

    Underlying profitability showed a mixed-grill between the top-line and the midline. While gross profit margin dropped from 33.6 per cent to 32.8 per cent, pre-tax profit margin improved from 9.8 per cent to 12.7 per cent. Also, return on total assets increased from 14.8 per cent to 20.4 per cent while return on equity slipped from 23.2 per cent to 20.6 per cent.

    Basic earnings per share slipped from 57 kobo to 55 kobo. The company meanwhile sustained its gross dividend of N176.8 million, representing a dividend per share of 30 kobo. Net assets per share however improved from N2.44 to N2.70, indicating that the company has been trading largely around its book value.

     

    Liquidity

     

    The liquidity position of the company declined marginally, although it remained considerably sufficient to meet emerging liabilities. Current ratio, which essentially measures the agility of the balance sheet to meet emerging financing obligations, slipped from 2.01 times in 2011 to 1.96 times in 2012. The proportion of working capital to total sales was flat at 22.4 per cent in 2012 as against 22.3 per cent in 2011. Debtors/creditors ratio stood at 771 per cent in 2012 compared with 745 per cent in 2012.

     

    Governance & structures

     

    Incorporated as a private limited liability company in 1992, Red Star Express became a public limited liability company and was quoted in 2007. Wholly owned by Nigerian institutional and individual investors, the major core investor in Red Star Express is Dr. Mohammed Koguna. Red Star Express has more than 4,200 shareholders with 589.4 million ordinary shares of 50 kobo each.

    Red Star Express generally complies with all relevant codes of corporate governance. Dr. Mohammed Koguna still chairs the seven-man board while Mr. Sule Bichi leads the executive management team as managing director. Red Star Express operates defined charity programmes including the Red Star Foundation which receives 0.5 per cent of net earnings annually for scholarships in public secondary schools.

     

    Analyst’s opinion

     

    Red Star Express shows steady outlook but it remains significantly challenged by relatively high input costs. While the top-line performance reflects the gains of its recent diversification programme, which has created new growth centres, the flat bottom-line underlines the limit of the modest increase in sale amidst rising costs. The company needs to increase sales substantially to provide headroom for profit growth. It particularly needs to address flagging margins, which may become more visible unless the company addresses the fundamental leakages.

    With earnings per share at 30.9 kobo by September 2012 as against 28.5 kobo in comparable period of 2011, there is reasonable basis to assume that the company could maintain a sufficiently positive overall outlook in the years ahead.

     

     

  • What premium for insurers?

     Insurance stocks have generally stagnated at their nominal values. With a negative year-to-date return of 18.60 per cent, insurance subsector still shows the hangovers of the stock market recession. What will bring back premiums to insurance base values? Taofik Salako reports on the underlining pricing trends in stock market’s largest subgroup

     

    The Nigerian stock market opens today with a year-to-date return of 28.66 per cent, indicating the generally bullish pricing trend that has characterised equity valuations so far this year. Substantial positive returns by other sectoral indices underscore widespread capital gains, which cumulated into the average overall return. Insurance sector index however opens today with double-digit negative return of 18.60 per cent, tagging along with the beleaguered oil and gas sector, which opens with -30.81 per cent.

    Out of the 32 insurance stocks, only three stocks-Aiico, Wapic Insurance and Mansard Insurance, have so far this year posted positive returns. Twenty five insurers remain dormant at nominal values while four stocks lose varied values. Compare the pricing trends in January 2008 and now, the extent of the recession in the Nigerian insurance sector looms larger than the global economic and financial crises. Insurance stocks have literally fallen off the cliffs. In the early 2008, nearly all insurance stocks were trading in three digits, in multiples of their nominal values and considerably in competitive prices with other related stocks. Prestige Assurance and Intercontinental Wapic Insurance-two sectoral leaders by share prices, opened February 2008 with four-digit values at N11.40 and N10.60 respectively. Today, Prestige Assurance is stuck at 51 kobo per share while Wapic Insurance has slumped to 56 kobo. Other insurance companies relate the same story. Aiico Insurance opened February 2008 at N3.43, Continental Reinsurance set out at N5.15, Cornerstone Insurance was N6.19, Crusader Insurance traded at N7.85, Custodian and Allied Insurance was N6.50, Great Nigeria Insurance opened at N3.80, Guinea Insurance’s price on board was N4.30, Lasaco Assurance was valued at N4.88, International Energy Insurance opened at N5.94 while Law Union and Rock Insurance was traded at N6.10. Other market considerations then included Linkage Assurance, N4.80; Mutual Benefits Assurance, N4.96; NEM Insurance, 4.35; Niger Insurance, N8.70; Oasis Insurance, N4.63; Royal Exchange Assurance of Nigeria, N5.43, Sovereign Trust Insurance, N4.56 while Unic Insurance opened February 2008 at N5.51 per share.

    But contrary to the largely diversify and generally upward pricing trend in early 2008, insurance stocks open today with almost a generic depressive outlook. Currently, more than 78 per cent of quoted insurance companies are trading at their nominal value of 50 kobo per share while the remaining few are trading mostly around the nominal value.

     

    Suffering from the hangovers

     

    Without major natural or artificial disasters that could have shaken risks-bearing companies to their net assets, the current outlook of the insurance sector is largely a direct result of the stock market recession. Heavily exposed to the equities market, unyielding depression in shares prices directly built up losses and provisions in the profit and loss accounts and balance sheets of insurance companies. On the other end, share prices of insurance companies have generally been the worst hit by the recession as a hangover of negative industry perception, streak of impaired portfolio-induced losses and reticent management combined to single out insurance sector as the highpoint of the bear market.

    With huge funds raised during the capital market boom, and following the trails of squandering banks, insurance companies had turned mainly to the capital market to invest their bubble-induced assets. Small and medium insurance companies, which had metamorphosed into big companies with outstanding shares and equity funds larger than size of business, left the conservative nature of risk assessment and provision-the core expertise of insurers, and turned into speculators. However, the general depression in the insurance sector appears to be more as a result of psychological investing or class phobia- a segregation that tends to view an entire group within the same window irrespective of individual potential. While the historic fundamentals of most insurance companies were discouraging, emerging fundamentals of several insurers show good potential, especially when viewed against the bottom-rock share prices. With improving bottom-lines in the immediate past year, several insurance companies had resumed dividend payments.

    For instance, nine-month report for the period ended September 30, 2012 showed that Aiico posted a pre-tax profit of N1.86 billion as against N1.02 billion recorded in comparable period of 2011. Profit after tax increased from N836.69 million to N1.18 billion. Also, Oasis Insurance’s profitability improved considerably with a pre-tax profit of N183.21 million by September 2012 as against N56.44 million by September 2011. Net profit after tax jumped from N45.98 million in 2011 to N171.55 million in 2012. Several other insurance companies have substantial net earnings while net assets are considerably higher than market values.

     

    Discovering values for insurers

     

    While investors need to tread cautiously, the relatively low turnover-to-net assets ratios of most insurance companies and low share prices present attractive combinations for discerning investors. On one hand, there is significant headroom for underwriting capacity and growth. On the other hand, there is still much growth potential in the Nigerian insurance industry. From government to the National Insurance Commission (NAICOM) and to operators, insurance stakeholders have recently taken major steps to enliven the performance of the industry. The passage of the Nigeria Content Development Act and other laws on compulsory insurance by government has opened up tremendous business opportunities for insurance companies. The Local Content Act requires that all insurance risks associated with oil and gas sector including prospecting, exploration, drilling, constructions, shipping, distribution, marketing and transportation must be insured in Nigeria with registered Nigerian insurance company. This law alone represents immense opportunity for well-capitalised and stable insurance companies.

    Besides, NAICOM has also in recent period taken many far-reaching and proactive steps to standardize insurance operations and enforce conformity with best practices. NAICOM has introduced new accounting standards with more stringent provisions to ensure that insurance profit and loss accounts and balance sheet showed the true state of affairs. Insurers are also expected to make timely rendition of accounts, making their returns more predictable. With the broad provisions of the Insurance Act and related NAICOM guidelines, the tough stand of the insurance regulator has greatly improved the operating environment. The industry regulator is also leading the charge for compliance with existing compulsory insurance laws.

    Although insurance industry is still highly fragmented with some 51 insurance companies, well-managed quoted insurance companies stand to benefit both in the event of industry consolidation or market-driven competitiveness that places premium on security of insurance rather than lower rates. With estimated penetration of some seven per cent, Nigeria’s large population and expansive economy also put insurers on good footings. It is these medium to long term outlooks that should concern discerning investors. While immediate liquidity may be a challenge, relatively good and stable returns and appreciable long-term capital appreciation will compensate for the waiting period.

     

  • PZ Cussons Nigeria: Falling behind

    PZ Cussons Nigeria: Falling behind

    Key performance indices of PZ Cussons Nigeria Plc turned negative in 2012 as significant increases in top and mid lines costs overwhelmed modest growth in sales. With lowest profit in nearly a decade, both actual and underlying returns halved to their recent lows while average net assets lost a fifth. Audited report and accounts of PZ Cussons Nigeria for the year ended May 31, 2012 showed that substantial increase in costs undermined profitability of the conglomerate. Substantial increase in interest expenses compounded relatively high cost of sales and steady operating expenses. The costs outline was worsened by exceptional item that arose from restructuring of the multinational’s supply chain and factory operations.

    The conglomerate meanwhile achieved a largely stronger balance sheet and financing position as significant decline in current liabilities compensated for modest declines in assets. The company became more liquid and stable.

    Financing structure

    PZ Cussons Nigeria sustained a zero-leveraged balance sheet while equity coverage for total assets improved in 2012. The proportion of total equity funds to total assets improved from 59.8 per cent in 2011 to 66.6 per cent in 2012. Current liabilities amounted to 27 per cent of balance sheet size in 2012 compared with 32 per cent in previous year. The positive financing structure was however, driven mainly by declines in assets and restructuring of its liabilities. Total assets had dropped by 6.6 per cent from N68.93 billion to N64.41 billion.

    Total liabilities declined by 16.4 per cent to N21.54 billion as against N25.76 billion, reflecting mainly the 22 per cent drop in current liabilities. With the capitalisation of reserves for bonus issue in previous year, paid up share capital increased by 25 per cent from N1.59 billion to N1.99 billion. Total equity funds flattened from N43.17 billion in 2011 to N 42.87 billion in 2012. Out of this, equity attributable to shareholders stood at N40.93 billion in 2012 as against N41.19 billion in 2011.

    Efficiency

    PZ Cussons Nigeria showed considerable decline in cost efficiency and productivity. Total cost of business, excluding financing charges, trended upward by five percentage points to 93.3 per cent of total sales in 2012 in contrast with 88.3 per cent in 2011. Average pre-tax profit per employee dwindled from N2.75 million to N1.74 million. Average cost per staff, on the other hand, steadied to N2.55 million in 2012 as against N2.30 million in 2011. The conglomerate’s workforce had reduced from 2,921 persons to 2,723 persons. Total staff cost however, increased from N6.71 billion to N6.95 billion.

    Profitability

    Considerable declines in profit margins across business segments, decline in export sales and near stagnation of the group’s electrical appliances business segment altogether brought the group’s profitability to its lowest level in nearly a decade. While the core business segment of branded consumer goods increased sales by about 14 per cent, almost 52 per cent decline in pre-tax profit compounded the near-stagnation in sales and 36 per cent decline in pre-tax profit in the electrical appliances segment.

    Also, 10 per cent growth in sales within Nigeria was counterbalanced by 6.2 per cent decline in export sales.
    Group turnover stood at N72.16 billion in 2012 as against N65.88 billion in 2011, representing an increase of 9.5 per cent. Segmental top-line analysis showed that the main branded consumer goods business segment increased sales from N44.83 billion to N50.97 billion. However, sales in the durable electrical appliances business line flattened to N21.19 billion in 2012 as against N21.04 billion in 2011. Geographical sales analysis showed increase in Nigeria’s turnover from N64.29 billion to N70.67 billion. Export sales dropped from N1.59 billion to N1.49 billion.

    Cost of sales rose by 18 per cent to N55.97 billion compared with N47.43 billion. This moderated gross profit downward to N16.18 billion in 2012 as against N18.45 billion in 2011. Total operating expenses inched up to N11.36 billion as against N10.74 billion.

    These consisted of selling and distribution expenses of N8.02 billion in 2012 as against N7.02 billion in 2011 and administrative expenses of N3.34 billion as against N3.72 billion. While non-core business income increased by 33 per cent from N440 million to N585 million, interest expense, which jumped by 433 per cent from N126 million to N670 million, further unsettled the bottom-line.

    With these, group pre-tax profit dropped by 41 per cent from N8.03 billion to N4.73 billion. Exceptional costs due to restructuring during the year reduced pre-tax earnings by N427 million to N4.31 billion. Group profit after tax shrank by 54 per cent from N5.22 billion to 2.41 billion. Provisions for taxes dropped by 24 per cent.
    Underlying profit analysis showed a generally negative outlook. Gross profit margin slipped from 28 per cent to 22 per cent. Group pre-tax profit margin halved from 12.2 per cent to 6.6 per cent. Average pre-tax profit per unit of sales in the branded consumer goods segment had declined from 11.6 per cent to 4.9 per cent while that of durable electrical appliances segment dwindled from 13.4 per cent to 8.5 per cent.

    Further earnings analysis indicated that earnings per share dropped from N1.64 to 61 kobo. Decline in net earnings forced the board of the company to reduce cash payouts from N2.73 billion to N1.71 billion, representing dividend per share of 43 kobo in 2012 as against 86 kobo in 2011. Net assets per share also fell from N12.97 to N10.31.
    The downtrend also reflected on underlying returns as return on equity halved from 12.7 per cent to 5.6 per cent. Return on total assets dropped from 11.6 per cent to 7.4 per cent. In spite of significant decline in cash dividend, the sustainable dividend outlook became less favourable with dividend cover at 1.42 times in 2012 as against 1.91 times in 2011.

    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 2.32 times in 2012 compared with 1.99 times in 2011. The proportion of working capital to sales remained steady at 32 per cent in 2012 as against 33 per cent in 2011. Debtors/creditors ratio stood at 384.2 per cent as against 371 per cent.

    Governance and
    structures

    PZ Cussons Nigeria is a subsidiary of PZ Cussons (Holdings) Limited, United Kingdom, which holds 68.75 per cent equity stake in the Nigerian company. However, more than 80,000 Nigerian individual and institutional investors hold equity stakes in the conglomerate. One of the earliest companies in Nigeria, PZ Cussons Nigeria was incorporated as a limited liability company in 1948. It became a public limited liability company in 1972 and was subsequently listed on the Nigerian Stock Exchange (NSE).

    The PZ Cussons Nigeria Group included PZ Cussons Nigeria-the parent company, and four other subsidiaries-HPZ Limited, PZ Power Company Limited, PZ Tower Company Limited and Robert Pharmaceuticals Limited. Besides HPZ Limited where the conglomerate holds 74.99 per cent equity stake, it holds 99.9999 per cent stake each in other subsidiaries. All the subsidiaries are active and trading, except Robert Pharmaceuticals.

    The principal activities of the group are the manufacturing and sale of a wide range of fast moving consumer goods including detergent, soap, pharmaceuticals, cosmetics, confectionery, cooling systems, food drinks and other electrical appliances.

    PZ Cussons Nigeria has maintained stable board and management over the years with requisite corporate governance structures to support its expanding business. There were no major changes in corporate governance structure during the period. Professor Emmanuel Edozien still chairs the board while Mr. Christos Giannopoulos leads the executive management team as managing director. The company broadly complies with the Nigerian code of corporate governance as well as the PZ Cussons international best practices.

    Analyst’s opinion

    The performance of PZ Cussons Nigeria underlined the need for comprehensive review of the business model and strategies of the group. With more small and niche companies upping the competition in the consumer goods market, conglomerate needs not only to substantially drive economy of scale to support its large base, but also engage in the delicate balancing act of providing consumers with relatively better package and pricing options. Less purchasing power often impinges brand loyalty.
    Globally, PZ Cussons has recognised the changing time. The multinational conglomerate has embarked on a deft restructuring programme that will concentrate manufacturing operations of the multinational in certain countries including Nigeria.

    The global restructuring project was sequel to high costs of operations that have increasingly impacted on the global profitability of the conglomerate. PZ Cussons thus developed the global restructuring programme to ensure that its supply chain cost base remains at a competitive level given sustained rise in raw material costs together with significant wage inflation in emerging markets. Besides concentration of operations, the group will also focus on reducing significantly its overhead at a number of other manufacturing facilities.

    Recent investments in upgrade and expansion of production facilities and introduction of new products are expected to form the linchpin for future growth. PZ Tower, which commenced operations in March 2012, is expected to increase the competitiveness of the company in the detergent segment.

    Consequently, there is reasonable basis to be optimistic about the prospects of the conglomerate.