DN Meyer Plc is still in the red, with earnings falling below expectations and weakening balance sheet highlighting new challenges to the recovery process. With marginal single-digit growth in sales and substantial increase in cost of sales, DN Meyer has been unable to muster the headroom to consolidate its appreciable midline cost management and for the first time in several years, make a modicum of return to shareholders. Latest audited earnings reports showed the limitation imposed by sluggish top-line, which could compound the threats of continuing decline in equity funds and increase in gearing ratio.
Audited report and accounts of DN Meyer for the year ended December 31, 2012 indicated that while sales rose by 9.1 per cent, a larger increase of 12 per cent in cost of sales undermined the top-line profit margin. The company fell on internal cost management, holding down total operating expenses to 4.4 per cent growth and reducing interest expenses by 5.8 per cent. It ended with a net loss of N27 million and 4.3 decline in net assets, a significant improvement on net loss of N54 million in the previous year. but to loss-weary shareholders, it may be another disappointment for a company that had became the most speculative and fastest growing, in terms of share price, at the stock market; in expectation of its final turnaround.
The balance sheet structure of the chemical and paints company also showed warning signals with about 13 percentage points increase in financial leverage, negative working capital and lower liquidity.
Financing structure
DN Meyer’s group total assets dropped by 5.4 per cent from N2.73 billion in 2011 to N2.58 billion in 2012. This underlined declines in both current and non-current assets. Current assets had dropped by about 11 per cent from N696 million to N621 million. Long-term assets slipped from N2.03 billion to N1.96 billion. Meanwhile, total liabilities also dropped by 5.8 per cent, largely due to decrease in trade creditors and long-term liabilities. Total liabilities stood at N1.93 billion in 2012 as against N2.05 billion in 2011. Current liabilities had dropped from N859 million to N802 million while non-current liabilities had declined to N1.13 billion as against N1.19 billion in previous year. While the paid up shares capital remained unchanged at N162.5 million-325 million ordinary shares of 50 kobo each, shareholders’ funds dropped from N679 million to N650 million.
With 40 per cent increase in short-term bank loans, the debt-to-equity ratio rose to 39.5 per cent in 2012 compared with 26.9 per cent in 2011. The proportion of equity funds to total assets, however, inched up to 25.2 per cent in 2012 as against 24.9 per cent in 2011. Current liabilities/total assets ratio almost remained flat at 31 per cent, the same scenario for long-term liabilities.
Efficiency
The company struck a commendable balance in the management of its high cost of sales and modest operating expenses. Although there were no available data to track per unit productivity and efficiency, there was an indication of improvement. Total costs of business-excluding interest expenses, in relation to sales inched downward to 98.5 per cent in 2012 as against 98.7 per cent in 2011. However, a cost range of almost 99 per cent is considerably high in relations to the turnover.
Profitability
DN Meyer witnessed improvements in its actual and underlying profitability. Although it remains in the negative, the quantum and degree of loss-making reduced considerably during the period. These, expectedly, reduced the built-in losses for shareholders. Group turnover rose by 9.1 per cent from N1.36 billion to N1.49 billion. Cost of sales outpaced sales with increase of 11.8 per cent to N922 million in 2012 as against N825 million recorded in 2011. Consequently, gross profit increased slightly by 5.1 per cent from N538 million to N566 million.
Total operating expenses stood at N543 million, 4.4 per cent above N521 million recorded in previous year. Non-core business incomes boosted the midline with an increase of 159 per cent from N25 million to N64 million. This, and 5.8 reduction in interest expenses from N123 million to N116 million, moderated the negative bottom-line, reducing pre-tax loss from N80 million to N29 million. After tax gains, net loss reduced from N54 million to N27 million.
While it was unable to declare any dividend, just as in the previous three years, shareholders recorded intrinsic loss per share of 8.0 kobo, albeit a better position than 17 kobo recorded in 2011. Net assets per share also declined by 4.3 per cent from N2.09 to N2.
The underlying fundamentals of the company remained negative, though considerably better than the previous year. while gross profit margin dropped from 39.5 per cent to 38 per cent, pre-tax profit margin improved from -5.9 per cent to -1.9 per cent. Return on total assets stood at -1.1 per cent in 2012 as against -2.9 per cent in 2011‘ while return on equity was better at -4.1 per cent compared with -8.0 per cent.
Liquidity
The liquidity position of the company worsened considerably in 2012 with negative working capital and lower coverage for possible immediate liabilities. Current ratio, which broadly indicates ability of the company to meet emerging financing needs by relating current assets to relative liabilities, dropped from below-standard position of 0.81 times in 2011 to 0.77 times in 2012. The proportion of negative working capital to total sales stood at -12.2 per cent in 2012 as against 12 per cent in 2011. Debtors/creditors ratio stood at 22.2 per cent in 2012 as against 9.5 per cent in 2011.
Governance and structures
One of the legacy companies, DN Meyer has history of more than seven decades and was an iconic brand in its industry. Before its incorporation in 1960, it had operated for two decades. It converted to public limited liability and listed its shares on the Nigerian Stock Exchange (NSE) in 1979. In 1994, the then Dunlop Nigeria acquired majority equity stake of 68 per cent in the company and thus changed its name from Hagemeyer Nigerian Plc to DN Meyer Plc. In 2003, DN Meyer acquired the flooring and adhesives business of Dunlop Nigeria, thus extending its business operations from manufacturing and marketing of paints to adhesives and floor tiles. Since then, it ran through series of acquisitions, mirroring the chequered history of its parent company.
DN Meyer is owned by some 8,000 shareholders.Recent shareholding analysis showed that three shareholders held the largest stakes-Citiprops Limited held the largest 30 per cent equity stake, Bosworth Limited held 10.95 per cent while Mr Osa Osunde held 9.26 per cent. The board and management of the company remain stable. Sir Remi Omotoso still chairs the board while Mr Adeola Omosebi is the Managing Director. DN Meyer largely complies with code of corporate governance. The timeliness of its earnings report however falls short of the generally acceptable standards.
Analyst’s opinion
The performance of DN Meyer shows the need for the company to increase the momentum of its restructuring. While it had significantly benefitted from soft loans from government’s fiscal supports, DN Meyer has yet to show the expected quantum leap. The company is far away from its turnover and profit before tax targets of N25 billion and N3.75 billion by 2016.
While it must be acknowledged that difficult operating environment, characterised by high cost of business, dumping of substandard and fake products, poor power supply and financial constraint, undermine corporate growth, DN Meyer needs to further look inward to reduce expenses and jumpstart sales. The time appears to be appropriate now for the planned recapitalisation of the company with a view to creating a more solid balance sheet that could support future growth. Slow sales and increasing gearing ratio are surely wrong mix for corporate growth.
