Airline Services & Logistics faces a bad earning season

Airline Services & Logistics may post the lowest profit in six years if its third quarter performance fails to improve considerably at full year. A big drop in profit happened in the third quarter and full year prospects indicate a possible profit crash from the peak figure the company recorded in 2012. Profit is under attack from both declining revenue and rising cost.

The company's turnover declined by 10.2% to N2.66 billion in the third quarter over the corresponding period last year. The full year outlook is indicating that revenue growth may step up in the final quarter due to seasonal boost in economic activity. However a decline in revenue still looks likely for the company at the end of the year.

Based on the third quarter growth rate, turnover is projected at N3.76 billion for the company in 2013. That will be a slight decline from the turnover of N3.83 billion the company reported in 2012. The company has not been able to achieve a reasonable growth in revenue since 2010 when its turnover declined from the 2009 peak of N3.84 billion. Its competitor, NAHCO has not achieved a strong growth in turnover either but has maintained a continuing growth over the past five years.

Inability to grow revenue is undermining the profit performance of the company. After tax profit fell by 82.6% in the third quarter to N79.3 million from N456 million in the corresponding quarter last year. The poor performance isn't expected to be remedied at full year. After tax profit is projected at N112 million for the company at full year. This is indicating that profit could fall by more than 77% at the end of this year.

The company had grown after tax profit by about 105% to a peak of N492 million in 2012. It has had a comparatively more stable profit performance than NAHCO over the past five years but its stable earnings record is very likely to be broken this year.

The big fall in the company's profit follows both the decline in revenue and inability to cut costs in line with the revenue weakness. The main offensive cost element is administrative cost, which grew by about 13% against the 10.2% drop in turnover. It therefore had the biggest adverse impact on the company's bottom line during the review period.

The company was able to keep cost of sales under control, as it went down at equal pace with revenue. Two other income lines declined during the period, which also affected profit capacity. These are interest income and other gains both of which declined in the third quarter. Interest cost also declined during the period.

The company has paid off its short-term borrowings of about N65 million at the end of last year and has taken a long-term loan of N530 million in the course of this year. The company isn't suffering the high interest burden that is undermining the profit performance of many companies this year.

Profit margin dropped significantly from 15.4% in the corresponding period last year to 3.0% in the third quarter. A net profit margin of 15.8% was recorded at the end of last year. NAHCO recorded a far higher net profit margin at 10% in the third quarter, which was equally a decline from 13.3% in the corresponding quarter last year.

The company earned 12 kobo per share at the end of the third quarter, which is a drop from 72 kobo in the corresponding period in 2012. Based on the full year profit projection, the company is expected to earn 18 kobo per share at the end of this year. This will be a major drop from the 78 kobo per share it posted at the end of last year.

The company paid a dividend of 25 kobo per share at the end of last year, which is above the earnings per share it is expected to generate at the end of this year. Either there will be a drop in dividend per share or the company will declare a dividend holiday.

A drop in dividend looks more likely for the company as it has a record of regular dividend payment. The company has retained earnings of about N1.5 billion that can be applied to support a higher dividend payment than current earnings.

The company's cash flow has come under pressure from both operating and investing activities. Net cash flow generated from operating activities dropped from N734 million in the corresponding period last year to N224 million at the end of September. Net cash flow used for investing activities rose from N25 million to N308 million over the same period. The company had to raise new money from borrowing to cover the financing gap.