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Portland Paints hopeful for profit despite tight revenue

By The Citizen
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Portland Paints & Products Nigeria is expected to close the 2013 operations at a profit against a loss position last year. Second quarter interim report shows a disappointing revenue performance but profit outlook is promising for the paints manufacturing company at full year. Profit expectation is however a little dicey in view of last year's performance when a profit of N88 million in the second quarter disappeared into a loss of N228 million at full year.

Chemical & Paints industry faced a general weakness in sales revenue growth in 2013 but the companies here took steps to defend profit through cost cutting. Portland Paints & Products however showed neither the strength to grow sales volume nor the ability to defend profit. It therefore lost both revenue and profit in the second quarter.

The company reported a decline of 7.6% in sales revenue at the end of the second quarter in June from N1.47 billion in the corresponding period in 2012 to N1.35 billion. Full year earnings outlook indicates that turnover may be flat at N3.1 billion compared to the N2.87 billion turnover the company posted in 2012.

Its competitor, Berger Paints is expected to record a marginal recovery in sales revenue in 2013 after reporting a decline in turnover in the preceding two years. CAP has achieved stable growth in turnover over the past five years, which is expected to be maintained in 2013.

After tax profit of the company fell by 33% to N59 million at the end of the second quarter. Net profit is estimated at N130 million for Portland Paints & Products Nigeria for the 2013 financial year. This will be against a loss figure of N228 million the company recorded at the end of 2012.

Net profit margin is down from 6.0% in the second quarter of 2012 to 4.3% in the same period in 2013. This is well below the profit margins of CAP and Berger Paints at 21.5% and 8.3% respectively at the end of their second quarter operations. Apart from inability to grow sales revenue, the company is equally weak in terms of converting its revenue into profit.

The profit expectation for the just concluded financial year is based on the expectation that other operating expenses of N278 million, which accounted for the loss in 2012 isn't likely to reoccur in 2013. That expectation is bolstered by the complete absence of such expenses in the second quarter as well as undermined by its equally complete absence in the corresponding period last year. That seems to leave the company's profit prospects for the year hopeful as well as dicey.

There is some level of cost control achieved in the face of a decline in sales revenue but one major cost line - selling & distribution expenses, remained out of control. Selling & distribution cost grew by about 36% to N208 million against the 7.6% decline in sales revenue. This means that the cost of selling a unit of the company's products rose by about 50% during the review period even as sales declined.

Administrative expenses also failed to go down as rapidly as sales revenue at 4.1% compared to 7.6% during the period. It therefore claimed an increased share of sales revenue over the period. Cost of sales however declined ahead of sales revenue at 9.6% to N758 million, improving gross profit margin from 42.8% in June 2012 to 44.1% in June 2013.

Two other favourable developments during the review period are a major improvement in other operating income and a flat growth in net interest expenses. The company therefore seems not to have experienced the burden of interest expenses that undermined the profit performance of many companies in 2013.

Its long-term borrowings went down by about 13% to N122 million between December 2012 and the end of the second quarter in June 2013 but short-term borrowings grew by about 21% to N358 million during the same period.

Other significant changes in the balance sheet during the review period include an increase of 9.9% in inventories and a drop of 38% in cash & bank balances. The company's cash flow came under pressure during the period with operating activities absorbing net cash resources of 37 million against the N295 million it generated in the preceding year. The company had to cut down heavily on investing activities to contain the cash flow pressure during the period.

The company earned 15 kobo per share at the end of the second quarter compared to 22 kobo in the corresponding period in 2012. Full year outlook indicates earnings per share of 32 kobo for Portland Paints & Products Nigeria in 2013.

The company is a watch candidate to see whether it will be able to make a strong entry into profitable operations or whether a bad second half will again wipe off initial profit records and close the year with a loss. Critical developments to watch for a major leap in its fortunes are a strong growth in sales revenue and a reasonable gain in profit margin.