SCOA: Profit constrained by non-growing revenue, rising costs

SCOA lost both sales revenue and profit in the third quarter but costs kept growing during the period. Inability to grow revenue and trim operating cost are the main challenges of the conglomerate in 2013. The two factors stand in the way of growing profit this year and a drop in profit looks very likely for the company at full year.

The company recorded a drop of 56.6% in after tax profit at the end of the third quarter from N98.6 million in the corresponding quarter last year to N42.7 million. Full year after tax profit is projected at N48 million for SCOA in 2013. This will be a drop of about 44% from the net profit figure of about N86 million the company earned in 2012. The 2012 profit was also a drop of about 62% from the profit figure of N226 million the company posted in 2011.

Profit growth is expected to remain constrained in the final quarter in continuation of the major slow down recorded in the third quarter. A step up from the third quarter position is however expected in the last quarter, as seasonal sales could prop up profit growth.

Of the company's after tax profit of N42.7 million at the end of the third quarter, less than N1.2 million was earned in the quarter. This shows a much wider drop in profit during the quarter at 87%. Declining revenue, rising cost of sales and increasing interest expenses accounted for the disappointing profit performance during the period.

The constraint in sales revenue growth is hitting back on profit margin. At the end of the third quarter, sales revenue came to N4.21 billion, which is a decline of 1.6% from the corresponding figure last year.

Revenue growth is expected to step up in the final quarter due to seasonal sales. Full year turnover is projected at N5.7 billion for SCOA in 2013. That will be a decline of 5.3% from the full year revenue of N6.02 billion the company posted in 2012.

Profit is expected to drop far ahead of sales revenue due to rising cost. Two major cost lines of the company are responsible for loss of profit margin this year. The first is cost of sales, which grew by about 3.0% at the end of the third quarter against a decline in sales revenue.

At N3.29 billion, cost of goods sold claimed 78.1% of sales revenue at the end of the third quarter, rising from 74.7% in the corresponding period last year. That caused a drop of 15% in gross profit, lowering gross profit margin from 24.4% in the 2012 full year to 21.9% at the end of the third quarter.

The other cost line that has encroached well into revenue this year is interest cost, which rose by 51.5% to about N316 million at the end of the third quarter. It claimed an increased share of turnover at 7.5% at the end of the third quarter against 4.9% in the corresponding period last year. At the end of the third quarter, interest expenses are only a little below the N327 million the company paid in all of the 2012 financial year.

The two cost lines are responsible for the company's loss of profit margin this year. Net profit margin has declined from 2.3% in the third quarter of last year to 1.0% at the end of September this year. The company closed last year with a lower profit margin of 1.4% than it achieved in the third quarter and a further decline is expected at the end of this year.

A significant cost saving was achieved in respect of distribution/administrative expenses at the end of the third quarter with a drop of about 22% against the corresponding figure last year. The cost saving is expected to be maintained to full year and other income, which nearly doubled at the end of the third quarter, is expected to help the bottom line as well.

SCOA is one of the conglomerates that has not been able to achieve as much diversification as UACN, Unilever or PZ Cussons. Consequently, growth in sales revenue remains slow, as the company isn't in the consumer facing end of the market. High import content of products keeps prices high, sales low and profit margin thin.

The company's operations are limited to sales of automobiles and equipment plus a bit of trading. None of the three major lines is experiencing outstanding growth in sales volume this year.

The company earned 6.6 kobo per share at the end of the third quarter, which is a sharp drop from the 15 kobo per share it reported at the same period last year. Based on the projected profit for the year, full year earnings per share is expected to come to 7.3 kobo for SCOA in 2013. The company had earned 13 kobo per share at the end of the 2012 financial year.

The company paid a dividend of 10 kobo per share for its 2012 operations and is expected to maintain dividend payment in the current year. A decline in dividend per share can however be expected in view of the likely drop in profit and earnings per share.

The increase in interest expenses this year reflects an increase in borrowings. Bank overdraft facilities have expanded by about 41% to over N878 million from the closing figure last year. Short-term loans have increased slightly at N1.24 billion.

Other significant changes in the balance sheet in the nine months of the year include an increase of about 27% in inventories, a drop of 29.2% in trade and other receivables and a drop of 79.5% in loan to related companies. There is a drop of 35.4% in cash and bank balances and an increase of 10% in trade and other payables.

The overall impact on the cash flow was adverse with net cash generated from operating activities dropping from N768 million at the end of last year to N453 million at the end of the third quarter. Net cash used in investing activities increased slightly during the same period and an overdraft facility had to be used to meet the cash needs of the company during the period.