July 14, 2008/Chuks Biosah
Dunlop Nigeria Plc ÃƒÆ’Ã†â€™Ãƒâ€ Ã¢â‚¬â„¢ÃƒÆ’Ã¢â‚¬Å¡Ãƒâ€šÃ‚Â¢ÃƒÆ’Ã†â€™Ãƒâ€šÃ‚Â¢ÃƒÆ’Ã‚Â¢ÃƒÂ¢Ã¢â‚¬Å¡Ã‚Â¬Ãƒâ€¦Ã‚Â¡ÃƒÆ’Ã¢â‚¬Å¡Ãƒâ€šÃ‚Â¬ÃƒÆ’Ã†â€™Ãƒâ€šÃ‚Â¢ÃƒÆ’Ã‚Â¢ÃƒÂ¢Ã¢â€šÂ¬Ã…Â¡Ãƒâ€šÃ‚Â¬ÃƒÆ’Ã¢â‚¬Â¦ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œ Buy or Sell?
Posted Friday, December 14, 2007
Upon the conclusion of Dunlop\'s secondary offering on February 2, 2007, the companyÃƒÆ’Ã†â€™Ãƒâ€ Ã¢â‚¬â„¢ÃƒÆ’Ã¢â‚¬Å¡Ãƒâ€šÃ‚Â¢ÃƒÆ’Ã†â€™Ãƒâ€šÃ‚Â¢ÃƒÆ’Ã‚Â¢ÃƒÂ¢Ã¢â‚¬Å¡Ã‚Â¬Ãƒâ€¦Ã‚Â¡ÃƒÆ’Ã¢â‚¬Å¡Ãƒâ€šÃ‚Â¬ÃƒÆ’Ã†â€™Ãƒâ€šÃ‚Â¢ÃƒÆ’Ã‚Â¢ÃƒÂ¢Ã¢â‚¬Å¡Ã‚Â¬Ãƒâ€¦Ã‚Â¾ÃƒÆ’Ã¢â‚¬Å¡Ãƒâ€šÃ‚Â¢s stock price experienced a sharp ascend gaining N4.78k, or 115% through February 26, 2007. However, after the meteoric rise, the stock began a slow but severe decline loosing N6.44k, or 72% during the next 9 months.
Subsequently, the stock began a slow recovery breaking through its 20 day cumulative simple moving average (CSMA) of N2.76k on November 6, 2007, and through its 50 day CSMA of N3.02k on November 11, 2007. This trading pattern was an indication of strong relative strength.
However, on November 15, 2007, after 20 days of positive up trend, the stock closed under its 20 day CSMA indicating a sign of short-term weakness. As at the close of trading on December 12, 2007, the stock was below its 10 day and 20 day CSMA of N3.29k and N3.38k respectively. The only encouraging indication is that the stock is above its flat 50 day CSMA of N3.07k. There appears to be turbulence ahead, because the 20 day CSMA is beginning to trend down. Technically, if the stock slips under the 50 day CSMA, it might be time for short-term holders of the stock to consider selling.
Financially, Dunlop Nigeria Plc has performed well below expectation for the most recent five fiscal years as gross earnings have declined or remained flat as shown in the graph below. The only exception of this not so attractive trend was in FY 2002 and FY 2004, when Dunlop experienced some increase in gross earnings. It might do well to boost investorsÃƒÆ’Ã†â€™Ãƒâ€ Ã¢â‚¬â„¢ÃƒÆ’Ã¢â‚¬Å¡Ãƒâ€šÃ‚Â¢ÃƒÆ’Ã†â€™Ãƒâ€šÃ‚Â¢ÃƒÆ’Ã‚Â¢ÃƒÂ¢Ã¢â‚¬Å¡Ã‚Â¬Ãƒâ€¦Ã‚Â¡ÃƒÆ’Ã¢â‚¬Å¡Ãƒâ€šÃ‚Â¬ÃƒÆ’Ã†â€™Ãƒâ€šÃ‚Â¢ÃƒÆ’Ã‚Â¢ÃƒÂ¢Ã¢â‚¬Å¡Ã‚Â¬Ãƒâ€¦Ã‚Â¾ÃƒÆ’Ã¢â‚¬Å¡Ãƒâ€šÃ‚Â¢ confidence if management can provide some reasons to explain why the company has not been able to grow its earnings without a major domestic competition. Since Michelin in early 2007 closed its manufacturing plant in Nigeria because of high operating expenses stemming primarily from high cost of Energy.
Additionally, a review of the most recent four (4) FYE financials reveals that the company reported pre-tax losses of N276M, N407M, N208M, and N653M respectively.
The pre-tax losses resulted from operating expenses which have increased sharply, while revenue has remained flat. For example, a review of the company\'s financial statements for the first quarter ended March 31, 2007 revealed that profit before interest & taxes (PBIT) was N28.7 million. However, after adjusting for interest expense of N366.3 million, the company reported a Net Loss before tax (NLBT) of N337.6 million. This basically indicates that the company is debt burdened and unable to service its debt from earnings generated from operation.
Fundamentally, we would not recommend adding to existing positions, or taking new positions of the stock at this time. Technically, the stock is barely holding up.