May & Baker: profit capacity remains broken for the second year

By The Citizen

May & Baker's profit performance remains down for the second year in 2013 after a big fall that happened last year. The cost temperature of the healthcare company remains high but improving sales revenue is helping to keep profit from a further fall. The company's profit dropped to the lowest level in several years in 2012 and no reasonable recovery is expected this year.

The company was able to raise sales revenue to a new high last year and a further improvement in turnover looks likely for the company this year. Sales revenue came to N4.45 billion at the end of the third quarter, which is an improvement of 14.5% over the corresponding figure in 2012.

Based on the third quarter growth rate, turnover is projected at N6.7 billion for May & Baker in 2013. This will be an increase of 18.2% over the sales revenue figure of N5.67 billion in 2012. The company has maintained a trend of growing sales revenue since 2010, which is expected to accelerate for the second year in 2013.

The improvement in sales revenue has been accompanied by inability to convert the earnings into profit. Profit margin dropped from 4.6% in 2011 to 1.3% in 2012 and only a marginal improvement may be possible at the end of this year.

Rising costs explain the company's current situation where the company is making new peaks in revenues but hitting the lowest profit records in several years. It reported an after tax profit of N55 million at the end of the third quarter, which is an improvement of about 28% over the corresponding third quarter figure last year.

Based on the growth rate at the end of the third quarter, after tax profit is projected at N78 million for May & Baker at the end of 2013. This will be a marginal improvement from the N76 million it earned in the preceding year. Profit growth could however step up in the final quarter as happened last year.

The company's profit performance has followed an unstable pattern of rise and fall in recent years. A two-year fall in profit in 2009 and 2010 has left the company's profit records down from the 2008 peak of N418 million. A recovery was seen in 2011 while a big fall followed in 2012.

GlaxoSmithKline Consumer, the industry leader, has maintained stable growth in both revenue and profit over the past five years and the growth trend is expected to be maintained in the current year. Fidson Healthcare has equally kept sales revenue growing but like May & Baker, has suffered significant drops in profit performance. The healthcare sector generally faces the challenges of high competition with cheaper imported drugs amid high operating cost facing local manufacturers.

Cost of sales keeps rising for May & Baker and this is one of the major developments that have depressed the company's profit capacity. At the end of the third quarter, cost of sales rose well ahead of turnover at 23.5% to N2.91 billion. It accounted for 65.3% of sales revenue, increasing from 60.5% in the corresponding period last year.

Gross profit margin therefore went down from 39.5% to 34.7% over the review period. Consequently, while the company grew sales revenue by 14.5% in the third quarter, cost of sales took all the increase. The company could not therefore improve gross profit margin during the period.

There were however cost savings on distribution/marketing expenses and administrative cost. Distribution/marketing expenses dropped by 15.8% and administrative expenses grew moderately at 4.5% during the period. With the cost saving, the company improved operating profit by 24.6% to N512 million.

A good part of the cost saving was however claimed by interest expenses, which rose by 25.4% during the period. The company's borrowings have expanded this year. Short-term loans have increased by 28.4% to N1.6 billion over the review period. Long-term debts are slightly higher than last year's closing figure at N2.2 billion at the end of September.

The drop in the company's profit capacity also reflects the virtual dry up of other incomes, which contributed N279 million to the earnings basket last year. Without this income line, which is only N2.3 million at the end of the third quarter, the company would have made a loss last year.

The company earned 5.6 kobo per share at the end of the third quarter compared to 4 kobo in the corresponding period last year. Full year profit outlook indicates earnings per share of 8 kobo for May & Baker in 2013. The company had earned less then 8 kobo per share in 2012, down from 22 kobo in 2011. Its peak earnings per share is the 59 kobo it earned in 2008.

Dividend payment has not been sustained in the face of profit weakness. No dividend was paid last year and cash dividend prospects aren't that promising this year in the light of low earnings expected. A considerable reinforcement of the company's profit capacity needs to happen to rebuild dividend capacity.

Developments so far in the year aren't giving confidence that the company has been able to treat the high cost ailment that has undermined its ability to build wealth for shareholders. Revenue is yet unable to grow ahead of cost of sales and interest expenses aren't letting any cost savings to get down to the bottom line. Hence the fundamental changes needed to lift the fortunes of the pharmaceutical company are yet to happen.