7UP Bottling Company: Expect the strongest profit growth in many years

7up Bottling Company is expected to come very close to doubling profit in its 2013/14 financial year. That level of profit growth hasn't happened for the soft drinks company in many years. Profit was already well above the preceding full year figure at the end of the third quarter. A big gain in profit margin and accelerating growth in sales revenue are the strengths for the company's outstanding profit performance in the current financial year.

The company has grown profit every year for the past three financial years with an accelerated growth in 2013. A further accelerated growth in profit is expected in the company's current financial year ending March 2014.

7up closed its third quarter operations in December with an after tax profit of N3.92 billion. This is a lifting of 180.5% over the corresponding figure in the preceding year. This is already well above the net profit figure of N2.86 billion it reported for the 2012/13 full year operations.

Based on the growth rate seen in the third quarter, after tax profit is projected to come to N5.6 billion for 7up Bottling Company in 2014. This will be a near doubling of the preceding year's profit figure at about 96%. The company had raised after tax profit by 38.2% in 2013.

The strength for the improved profit performance in the current year is coming from improvement in profit margin and accelerating growth in sales revenue. Net profit margin has improved from 3.1% in the third quarter of the preceding financial year to 5.5% at the end of December 2013. It is also a continuing improvement from a net profit margin of 4.5% the company recorded at the end of the preceding financial year.

The second factor for the improved profit performance of the company is accelerating growth in turnover. Sales revenue amounted to N54.95 billion at the end of the third quarter, which is an increase of 22.7% over the corresponding figure in the preceding year.

Based on the revenue growth rate in the third quarter, turnover is forecast at N76.8 billion for 7up Bottling Company in 2014. This will be an increase of about 20% over the sales revenue figure posted in the 2013 financial year. Sales revenue is therefore expected to accelerate in the current year from the marginal improvement of 4.1% in the preceding year. The company has maintained a record of continuing improvement in sales revenue in the past five years.

Generally, costs grew at a slower pace than income for the company in the third quarter. This enabled it to convert an increased proportion of earnings into profit. Cost of sales grew at 17.4% at the end of the third quarter compared to the 22.7% increase in turnover. That empowered the company to raise gross profit well ahead of revenue at 32%. Gross profit margin therefore improved from 36.6% in the corresponding period in the preceding year to 39.4% at the end of the third quarter.

Further cost moderation came from selling/distribution expenses, which grew by 15.3% over the review period. The proportion of sales revenue claimed by both cost of sales and selling/distribution expenses declined from over 84% to 80% during the review period.

The only major expenditure line that failed to moderate is administrative cost, which rose by more than 30% during the review period. At N4.72 billion at the end of the third quarter, administrative expenses had already exceeded the full year figure in the preceding year.

The biggest cost saving for the company came from interest expenses, which dropped by 35.3% to N1.18 billion at the end of the third quarter. That provided the strength for a 192.4% advance in pre-tax profit during the review period.

The drop in interest charges is not explained by any significant drop in the company's borrowings. Long-term borrowings slightly increased at N5.08 billion over the full year figure in 2013. Bank overdraft has expanded by more than 74% to N1.45 billion but short-term borrowings have declined by 8.0% to N12.87 billion.

The company earned N6.11 per share at the end of the third quarter, increasing from N3.18 in the corresponding period in 2012. This is already above the company's earnings per share of N4.46 recorded in the 2013 full year.

Earnings per share is projected at N8.74 for 7up Bottling Company in 2014. This will be a new peak in the company's earnings records.

7up Bottling Company is regular with dividend payment and gave a dividend of N2.20 per share to shareholders from its 2012/13 operations. This is a dividend pay-out of 49.3%. Assuming the same pay-out ratio, a minimum dividend of N4.30 may be expected from 7up Bottling Company at the end of its 2013/14 operations.