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THE CITIZEN Editorial Review NASCON improving profit from falling revenue

By The Citizen

National Salt Company of Nigeria [NASCON] is losing sales revenue in the current year but it is gaining profit with all-round cost control. Turnover may drop for the first time since the company's successful turnaround in 2007 but profit is headed for a moderate improvement at the current growth rate.

The company closed its second quarter operations with a turnover of N5.34 billion, which is a drop of 23.8% from the sales revenue of about N7.0 billion reported in the corresponding quarter last year. This equally represents a slow down in the growth rate from the turnover figure of N2.78 billion the company earned in the first quarter.

Based on the growth rate in the second quarter, NASCON is expected to close the current year with a turnover of N11.5 billion. This will be a drop of 15% from the sales revenue of N13.41 billion the company posted in the 2012 full year. The company has maintained a stable growth in sales revenue since it completed a turnaround programme in 2007.

The weakness in sales revenue in the current year reflects the general lull in the food/beverages sector and the economy. Low consumer spending is affecting even the consumer facing industries this time. Except Cadbury and Flour Mills that are expected to step up sales revenue this year, other food/beverages companies are facing either a moderate growth or a decline in sales revenue this year.

NASCON is able to shield its profit from the drop in sales revenue through effective cost management. The company posted an after tax profit of N1.39 billion at the end of the second quarter, which is a marginal improvement of 2.1% over the corresponding figure in 2012. It is a slight improvement in the growth rate from the net profit figure of N687 million reported in the first quarter.

The ability to keep profit up against a drop of almost 24% in sales revenue speaks of a major cost management success on the part of the company's management. Based on the current growth rate, NASCON's net profit is forecast at N2.92 billion at the end of the current year. This will be an improvement of 4.7% over the full year net profit figure of N2.77 billion in the preceding year. Except in 2010, when the company's profit declined by 10.3%, NASCON has grown after tax profit every year since it returned to profit in 2007.

Amid the revenue weakness, the company has built a new strength in converting revenues into profit. Net profit margin has come to a new peak at 26% at the end of the second quarter. This is a strong improvement from 19.5% in the corresponding period last year and from 20.5% at the end of 2012 operations. It is also a further improvement from 24.7% net profit margin recorded in the first quarter.

With 26%, NASCON is on the lead of the food/beverages group on profit margin so far this year. It beats Nestle, which recorded a net profit margin of 17.9% in the second quarter and Cadbury follows with a net profit margin of 14.3%. Dangote Sugar comes next on profit margin at 12.7% at the end of the second quarter followed by 7up with a net profit margin of 8.3%.

NASCON's strength in profit margin is built by dropping key costs of the company at a faster rate than the decline in sales revenue. Cost of sales went down by 31.9% to N3.02 billion compared to a 23.8% fall in turnover. That resulted in a slower decline in gross profit margin at 9.6%. Administrative expenses also dropped at a faster pace than revenue at 24.7%. The overall favourable cost behaviour was also reinforced by a leap of over 244% in interest income during the review period.

The company earned 52 kobo per share at the end of the second quarter, a slight improvement from 51 kobo in the corresponding quarter in the preceding year. Full year outlook indicates earnings per share of N1.09 for NASCON in 2013. This will be a slight improvement from the earnings per share of N1.04 the company reported in the 2012 full year.

The company paid a dividend of 90 kobo per share for its 2012 operations, which is a pay-out ratio of 86.5%. In view of the moderate improvement in earnings per share anticipated for the company at full year, an improvement in dividend per share is not expected at the end of this year. It is likely that the company will repeat the 90 kobo dividend per share for this year, assuming the forecast earnings target is realised.

NASCON is consistent on dividend payment and has paid cash dividends every year since 2007. Its dividend record improved from 80 kobo per share in 2011 to 90 kobo in 2012.

The company is expected to maintain the growth in profit in the third quarter while its sales revenue performance might improve. Critical developments to watch on the company in the second half of the year include the ability to keep profit margin up in a declining revenue situation. The ability to realise the full year profit forecast will be strengthened if revenue growth steps up and weakened if profit margin declines.