Berger Paints Plc – Soaring Interest Expense Underscores Pessimism

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Topline Growth in Q1:2020 Masks Underperformance in Q2

In H1:2020, Berger Paints Plc reported revenue growth of 10.98% to NGN1.69bn (vs NGN1.53bn in H1:2019) despite the -2.43% drop in Q2:2020. The increase was realized from the higher sale of paints (+10.98%) and significantly higher (+237.62%) contract services rendered during the period.

Although we observed that trade receivables increased by 29.81% from 2019FY, suggesting increased credit sales. Berger Paints also shows no letup in its efforts to increase market share in the highly fragmented and competitive industry as it intensifies on marketing and rebranding, evinced by a 4.97% increase in selling and distribution expenses. It is noteworthy that the company recently completed its 7-year long automated plant project.

This new plant puts the company’s installed capacity at 8 million litres per annum (vs 5.6million litres per annum) and, when considered in line with marketing efforts and the potential demand (especially in the decorative segment), is expected to positively impact the momentum of topline growth.

Going forward, as lockdown measures are eased, we expect demand to pick up gradually in Q3:2020 and beyond as we begin to see a rebound in economic activities. Thus, we project revenue to settle at NGN3.83bn in 202FY; a 7.00% growth compared to NGN3.59bn in 2019FY.

Finance Costs Undermine Bottomline Performance

During the period, Berger Paints witnessed a surge in direct costs (+31.82% YoY) to NGN1.11bn as raw material expenses increased by 22.27% YoY (as a result of the FX adjustment), while contract services expense also spiked by 166.32% – in line with the rise in contract services rendered. The rise in direct costs clearly pared gross margin to 39.10% in H1:2020 (vs 46.05% in H1:2019).

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The effect of the cost build-up on operating margin was exacerbated by an elevated operating expense. OPEX climbed higher by 18.59% on account of increased sales and marketing personnel and higher distribution costs (+8.92%). Consequently, operating margin sank to 5.09% in H1:2020 (vs 13.60% in H1:2019).

Read Also:  Berger Paints Appoints Two New Independent Non-Executive Directors

Moreover, we reckon that interest obligations on lease liabilities and payment of accrued interest on its Bank of Industry loan led finance costs to increase 3.51x to NGN40.04mn (vs NGN8.87mn in H1:2019). This weighed heavily on profit after tax as it declined by -71.79% to NGN41.09mn (vs 145.65mn). Thus, the net margin was visibly lower at 2.25% (vs 9.30% in H1:2019).

Going forward, we expect the just completed automated plant to yield some cost savings for the company through the reduction in material handling and process lead time. However, we are not oblivious of the effect of the CBN’s FX adjustment on the cost of import requirements. On a balance of factors, we expect the direct cost to increase by 15.84% at the end of the year.

Also, we expect finance costs to increase by 240.31%, mainly on the back of subsequent payments of interest obligations on its lease liability. Thus, we project a lower profit of NGN171.68mn (vs NGN448.73mn in 2019FY) for the year.

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Berger Paints Plc - Soaring Interest Expense Underscores Pessimism

Lacklustre Earnings in 2020FY to Dampen Shareholders Return

The outlook for a return to shareholders is not helped by our expectations of pressured earnings in 2020FY. Although Berger Paints’ annualized ROE currently stands at 11.31% (peer average – 12.56%), it lags 2019FY performance (14.95%) – mainly a result of the weaker net margin in 2020 so far.

Also, while Berger Paints’ liquidity metrics suggest a comfortable standing (working capital of NGN349.88mn and a current ratio – 1.21x), we express our worry over its long term cash-generating abilities following the elongated operating cycle – 45 days in H1:2020 (vs. 21 days in 2019FY, CAP; -36days).

Recommendation

For 2020FY, we project an EPS of NGN0.59 and P/E ratio of 5.10x to arrive at our December 2020 target price of NGN3.02 (a downside potential of 50.08%). Hence, we maintain our SELL rating on the counter.

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Meristem Research

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Four 12 Year Old Students To Tackle Hong Kong’s Longest Trail to Raise Funds for The Child Development Centre (CDC) for Children with Special...

HONG KONG SAR - Media OutReach - 9 March 2021 - From 27 to 29 March 2021, four secondary school students will challenge themselves to complete the longest trail in Hong Kong - the 100km MacLehose trail. Their aim is to raise essential funds for The Child Development Centre (CDC), a non-profit organisation that supports children with special educational needs. Please support and donate to this cause at https://www.simplygiving.com/100km-hike-for-special-needs

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Jack, Jaden, Gabriel, and Martin are year-12 students at an international school in Hong Kong. The hike they will complete is not only daunting in length, but also challenging due to the elevation of 5,053 metres. The students chose the CDC as the sole beneficiary as Jack's younger sister previously attended an early intervention programme there. "This organisation (the CDC) is very close to Jack's heart, as he has a younger sister with Down's Syndrome, and understands the difficulties that families face when raising and educating special needs children to reach their full potential, which is something that every child deserves.

"Money donated to the CDC will go towards programme and service expenses, allowing them to aid even more families, and provide even better care with their top notch teaching specialists and therapists. Furthermore, it is no doubt that under the current COVID-19 pandemic, non-profit organisations like this will be impacted the most, so any money donated will be especially helpful now more than ever. We would really appreciate your support on our journey and cause!"

Dr. Yvonne Becher, the Chief Executive of the CDC, expressed her gratitude to the students for organising this meaningful event, "we are grateful for Jack's and his team's initiative, and are glad that the CDC's work is being recognised and has created such positive value to families throughout the years. Hope everyone can also feel the love and faith that Jack has for his sister, and spread the positive energy to many other children with additional needs in our society."

Berger Paints Plc - Soaring Interest Expense Underscores Pessimism - Brand Spur Berger Paints Plc - Soaring Interest Expense Underscores Pessimism - Brand Spur


Based on each child's needs, the CDC's multidisciplinary team offers services such as assessments, early intervention programmes, speech therapy, occupational therapy, and targeted support programmes addressing social skills, sensory processing, attention, behaviour, early literacy and numeracy, and more. The CDC is also committed to supporting parents and professionals through counselling services, outreach screening, and child development training.


This press release is distributed by The Child Development Centre and supported by Media OutReach Newswire

About The Child Development Centre:

Igniting Learning Journeys - One Child at a Time

The Child Development Centre (CDC) is a non-profit education, assessment and therapy provider for children of early childhood age (0 - 8) with a wide spectrum of additional learning or developmental needs. We envision that every child will succeed in their unique learning journey and are missioned to provide quality learning experiences for the individual child and empower their families. The CDC is one of only two government-supported Early Education and Training Centres (EETCs) in Hong Kong which provide programmes and services in both English and Chinese, serving more than 400 children per year.

Address: 4/F, Prime Mansion, 183-187 Johnston Road, Wan Chai, Hong Kong

T 3462 2875 | F 2849 6900 | www.cdchk.org

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