CAP Plc: Growing Through Innovative Distribution


Friday, September 11, 2015 12:32PM / FSDH   

HY 2015 Performance Analysis:
The unaudited HY result of Chemical and Allied Products Plc (CAP Plc) for the period ended June 30, 2015 shows that its Turnover (T/O) increased by 6.24% to N3.56bn, compared with N3.35bn recorded in the corresponding period of 2014.

This slow growth observed during the first half of the year is at variant to the company’s usual growth pattern with sales probably being hampered by poor consumer demand and the slowdown in economic activities tied to the election period that took place during the period.

The cost of sales during the period under review also increased by 3.19% to N1.69bn from N1.63bn recorded in HY 2014. Cost of sales as a percentage of turnover decreased from 48.77% in the prior period to 47.37% in HY 2015.

The lower increase in costs of production relative to sales reflected the efficiency of the company’s production processes despite the increase in the costs of imports.

The administrative expenses increased marginally by 0.12% to N464.37mn from N463.83mn in HY 2014, while selling and distribution expenses increased by 2.83% to N272.58mn in HY 2015 from N265.08mn in HY, 2014.

The administrative, selling and distribution expenses as a percentage of turnover decreased to 20.71% from 21.76% in HY 2014 as the company focussed on cost reduction strategies in the face of slower revenue growth.

The other operating income stood at N28.19mn as at HY 2015, representing an increase of 6.81% compared with N26.39mn recorded in HY 2014.

The increase recorded was as a result of increases in the company’s management fees as well as the sale of one of the company’s fixed assets.

The Profit Before Tax (PBT) stood at N1.27bn, representing an increase of 16.19% from N1.10bn recorded in the corresponding period of 2014. A tax of about N404.49mn was recorded in HY 2014 as against a tax provision of N350.53mn in the corresponding period of 2014.

This led to a Profit After Tax (PAT) of N868.22bn in HY 2015 from N744.88mn in the corresponding period of 2014, representing a growth of 16.56%.

The company’s profit margins improved in HY 2015 compared with HY 2014. The PBT Margin in HY 2015 increased over both the HY 2014 and the Financial Year ended December (FY), 2014 figure.

The PBT margin increased to 35.77% in HY 2015 from 32.71% in HY 2014, and increased from 34.95% in FY 2014. Also, the PAT margin currently stands at 24.40%, up from 22.24% in the corresponding period of 2014, and also an increase from 23.79% as at FY 2014.

This result also indicates that the percentage of T/O, PBT, and PAT in the Q2 June 2015 to the audited T/O, PBT and PAT for the period ended December 2014 are: 50.92%, 52.11% and 52.23%, respectively. Given the run rate, the company is expected to exceed its previous year’s performance.

A cursory look at the balance sheet position as at HY 2015 compared with the position as at FY 2014 shows a decrease in the company’s fixed assets. The total fixed assets decreased by 4.57% to N481.67mn from N504.76mn in FY 2014 as the company sold off some of its fixed assets.

The inventory increased by 16.14% to N673.94mn from N580.30mn in FY 2014. The cash and bank balance increased by 74.60% from N1.09bn in FY 2014 to N1.91bn in HY 2015.

The company’s trade debtors also increased in HY 2015 by 44.64% to N172.41mn from N119.20mn in the FY 2014, while trade creditors decreased by 24.81% to N141.11mn from N187.66mn as at FY 2014.

The net assets increased to N1.45bn from N1.18bn recorded in FY 2014, while working capital for the period increased by 39.50% to stand at N1.05bn from N750.12mn as at FY 2013.

The total assets of the company which stood at N3.65bn as at HY 2015 were financed by a mix of equity and liabilities in the ratio of 39.84% and 60.16% respectively.

Our analysis of the liabilities shows that the short-term liabilities stood at N2.12bn, accounting for 96.61% of the total liabilities, the long-term liabilities stood at N74.31mn, accounting for 3.39% of the total liabilities.

The short-term liabilities constituted mainly of current income tax liabilities followed by trade creditors and other payables, while the long-term liabilities constituted mainly of deferred tax liabilities which remained constant year-on-year.

Drivers of Performance:
CAP’s performance in HY 2014 was driven by some factors including:

Positive Factors:

·         The expansion of its operations to eight (11) new locations in 2014.

·         Deployment of its Dulux Mobile Room Makeover.

·         Engaged in Jet coding of product packages to deter adulteration of products.

·         The increasing demand for building and housing products.

·         Strong alliance with UPDC.


Negative Factors:

·         Difficult macroeconomic factors.

·         The fall in consumer purchasing power in the economy.

·         Slowdown in economic activity due to the electioneering period.

·         Strong competition from other players that target the middle and lower income end of the market.

In arriving at a fair value for the ordinary shares of the company, we used the Discounted Free Cash Flow (DCF) model. We applied a terminal growth rate of 5.99% and used a beta value of 0.50x .

We used the yield of 15.95% as our risk free rate, and market premium of 11.15%. Applying the foregoing parameters on the Capital Asset Pricing Model (CAPM), the cost of equity generates 21.52%.

The company has no long term debt; hence the Cost of Capital, which is our discount rate, was estimated at 21.52% (the same as its cost of equity). Using 700mn shares in issue, the DCF model generated N38.16 per share, which is our fair value.

The current market price of CAP Plc shares is N37.05. The highest and the lowest closing price in the last 52 weeks are N43.99 and N34.00 respectively. The forward earnings yield and dividend yield based on our fair value are: 6.96% and 6.55% respectively.

The total return, a combination of the capital appreciation and the dividend, generates 9.75%. This is lower than the current yield on the FGN Bond of 15.95%.

We therefore place a HOLD on the shares of CAP Plc at the price of N37.05 as of September 08, 2015. We however note that the shares of the company may trade at a premium over its fair value because of its attractive return on equity (ROE) and dividend payment.

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