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CAP: Earnings expected to maintain stable growth

By The Citizen
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Chemical and Allied Products (CAP) is expected to maintain stable earnings growth records in the 2014 financial year. Sales revenue and profit are expected to keep a balanced growth with a good chance for a slight gain in profit margin. This is the trend the chemical and paints manufacturing company has maintained for the past several years, which by its first quarter result, has defined the earnings outlook for the current year.

At the end of the first quarter, sales revenue was up by 19.7% to N1.75 billion from the corresponding figure last year. Based on the growth rate in the first quarter, the company is expected to close the year with a turnover of N7.52 billion in 2014. This will be an increase of 21.5% over the full year revenue figure in 2013.

The company had grown sales revenue by 18.4% to N6.19 billion in 2013. Revenue growth has been stable for the company over the past several years at an annual average of 19.6% in the past five years. This is an indication of ability to defend market share in a highly competitive market place.

In addition to accelerating revenue, there is a strong growth also in other operating income, which rose by 27.6% to N14.47 billion in the first quarter. This is an accelerating growth compared to the improvement of 14% in other operating income in the 2013 full year. Finance income is also showing an improving performance at an increase of 13% in the first quarter compared to a decline in the 2013 full year.

The company posted an after tax profit of N402.52 million at the end of the first quarter, which represents an increase of 30.4% from the corresponding quarter in 2013. Based on the growth rate in the first quarter, full year net profit is projected at N1.74 billion for CAP in 2014. This will amount to an increase of 22.5% over the net profit figure in the preceding year.

After tax profit grew virtually at par with sales revenue at 18.3% to N1.42 billion in 2013. A step up in the growth rate is therefore likely for the company in the current year. The company has grown after tax profit continually in the past five years though at fluctuating rates. On the average, after tax profit has grown well ahead of turnover in the past five years at 50.8%.

In the current year, profit is also growing ahead of revenue, which is indicating greater cost management effectiveness by the company. The ability to convert revenue into profit has increased in the current financial year. There is an improvement in net profit margin from 21.1% in the corresponding quarter last year to 23% at the end of the first quarter. This is virtually at par with the net profit margin the company recorded at the end of the 2013 financial year.

The gain in profit margin is coming from a moderation of cost of sales, which increased by 9.7% to N842.59 million compared with the growth of 19.7% in sales revenue. The proportion of revenue claimed by cost of sales went down from 52.6% in the first quarter of last year to 48.2% in the current year. This enabled gross profit margin to grow well ahead of sales revenue at 31% to N904.55 million in the first quarter.

Selling and distribution expenses are growing far ahead of sales revenue, indicating that greater effort is being made to achieve the improving sales figure. Selling and distribution cost grew more than twice as fast as sales revenue at 46% to N131.06 million in the first quarter. This is a reversal of last year's position when selling and distribution expenses grew by 11% against the 18.4% growth in sales revenue. Administrative expenses are also growing slightly ahead of turnover at 21.3% to N235.77 million.

The company's balance sheet is entirely free of interest bearing debts and there is therefore no interest expenses at all. This has helped the company to defend its profit margin in the present situation where high interest charges are eroding profit margins of many companies.

At the end of the first quarter, inventories declined by 20.5% to N459.51 million over the December 2013 level but trade debtors and other receivables rose by 158.8% to N1.34 billion. The high growth in receivables is suggesting that about one-half of the sales made in the first quarter happened on credit. The company is clearly relying on credit inducement to push sales. This has affected cash flow with cash and bank balances declining by 5.4% to N1.38 billion during the same period. Trade and other payables increased only slightly at 3.7% to N735.52 million.

The changes in the balance sheet resulted in cash flow difficulties for the company in the first quarter. Operating activities used a net cash of N108.70 million in the first quarter against a net cash of N1.45 billion generated in the 2013 full year. Despite a huge drop, interest income continued to keep net cash flow from investing activities positive and there were no movement at all in respect of financing activities. The absence of cash flow pressure from investing and financing activities enabled the company to manage the drop in cash flow from operating activities during the period.

The company earned 58 kobo per share in the first quarter, improving from 55 kobo in the corresponding quarter in 2013. Based on the projected profit for the company at full year, earnings per share is expected to come to N2.48 for CAP in 2014. This will be an increase from the N2.02 per share the company earned in 2013. This will be a major improvement after a slowdown in earnings per share in 2013, which was induced by a bonus of one for four paid within the year.