Can 7-Up Bottling Company sustain its share price?


Monday, June 01, 2015 1:23 PM /Invest Data Consulting

Company Profile

A Lebanese Mohammed El-khalil who came to Nigeria for the very first time in 1926 founded the company. The company metamorphosed from a very successful transport business [El-Khalil Transport], in a bid to diversify the then largest transport company in the entire West of Africa. On October 1st 1960, the exact day Nigeria gained her independence; Nigerians also experienced the birth of a soft drink giant. It was on that day that the first bottle of 7Up rolled out from the factory located in Ijora, Lagos.

Since then, 7-UP has continued to grow steadily. In the late 80s, it established two more plants in Ibadan and Ikeja. In the early 1990s when Pepsi International took over 7Up international, it again got great opportunities to introduce the Pepsi brand to the Nigeria people. As at today, the company has its Headquarters in Beirut and operational base in three African countries namely, Nigeria, Tanzania and Ghana. The company currently operates from eight plants in Nigerian. They are; Ibadan, Ikeja, Kaduna, Ilorin, Kano, Enugu, Aba and Benin.  

2015 Financial Performance Analysis
The company’s exceptional performance as shown in all profitability ratios and dividend payout has boosted this equity’s fundamentals through the years, despite the company’s conservativeness in payout for years. The company’s numbers are growing as reflected on top and bottom lines. The most interesting thing is the constant rally of its share’s price from the opening of N90 per share opening at the beginning of the last financial year to the year’s closing figure of N156 on 31, March 2015. The consistency in the release of its financials reports, as well as constant dividend payment, improved earnings and stable book value regardless of its premium position are ingredients that solidify investor confidence in the stock. On the strength of the company’s earnings power the stock is currently valued at N120 per unit share.

Four Years Performance Indices
As the market continue to revalue the company’s share on strength of numbers posted for the last financial year ended 31st March 2014, and  the quarterly  management account for the financial year ended  March 31, 2015 which are expected to hit the market in less two months.  On the strength of quarterly numbers so far, the projection of impressive performance at the end of the day is high and in order. The Bottling Company in its past financials is seen to have recorded a constant growth in its sales revenue and profit.  Turnover gradually rose  from the N51.10 billion of 2011 to N77.89 billion in the last full year of 2014; just as bottom line  had a geometric growth within the same period, except for the slight drop noticed in 2012, profit recorded through the four years under observation was strong and impressive that supported its share price. Total Equity now stands at N17.33 billion from the previous N8.58 billion posted in 2011 representing more than 100 percent growth to also reflect the investment injection into its capacity building.

One of the strong supporting factors of the equity is the constant investors’ reward in terms of dividend payment no matter how small relation to its share price but strong earnings power has supported price. Looking at the table, investors have conveniently taken N8.70 as dividend in four years. Please note that the company share capital has remained constant for this period and is also relatively small that had supported the numbers and share price so far. This company even with its increasing capacity, is yet to meet the demand for its products, since the rebranding and repackaging of its products.  Demand for its products have been on the increase, reflecting on its profit line regardless of the increasing cottage companies in the industry providing high competition.

Ratio Analysis
The company earnings power and growth reflected on its earnings per share that moved from N3.56 in 2011 to N10.04 in 2014 with a little drop in 2012. Investors’ positive response to impressive results and strong earnings had reduced investors waiting investment period from 12.66x to the current 9.26x of the period of entry. Please note that the 2014 full year earnings per share yielded 10.80 percent of the price at released date. Returns on Equity employed through the period were on the average of 25.75 percent, while the margin of the profit to the turnover figures stand low between 4.47 percent and 8.28 percent to reflect huge cost of operation that should require immediate action from management to create value for its shareholders. Unfortunately, the book value of the company is far below its market value, an indication of the premium placed on the stock by investing public, suggesting that management should also grow its assets to build margin of safety for the investors

Latest Result
The company’s third quarter earnings report for the period ended December 31, 2014, recorded a marginal growth in sales and improved in earnings. The numbers show an impressive performance that has raised the expected full year profit outlook higher than previous years. When the numbers posted in same period of 2013 was compared a growth of 8.87 percent in turnover figure from N54.95 billion to N59.83 in 2014. Profit equally outpaced the comparable period by over 16 percent, and shareholders’ funds grew to the current N20.27 billion from N15.09 billion in 2013 representing an increase of 34.35 p

A corresponding growth was seen in most of the estimated ratios, with the Book Value at N31.64. Return on Capital Employed now stands at 22 percent as against the 26 percent estimated from the comparable period financial. With Trailing EPS of 7.09, while  the full year EPS is projected to be in the region of N10 and above, h dividend expectations for the full year Earnings of about 60 percent is expected as likely dividend, if lower with script share to thank investors for their fate in the company. Please note that the average dividend payout ratio in 4 years stands at 43 percent.

Analysts Findings/Recommendations
The company in its expected financial year had increased its production line by adding new lines in four of its production plants, Kano, Ilorin, Enugu and Ikeja. This expansion is to meet market demand which the company is currently unable to meet demand of it products as it market share continued to increase due to its low price penetration strategies.

After the release of its quarterly financia figures, price soared from the N93 range to the current N178. This could be linked to the improved performance figures that in-turn build investors’ confidence and appetites for the stock. It should be noted that price has always adjust upward with strong quarterly and expected full year results. This suggests that investing public with medium to long term horizon should look the way of this stock. The company increasing capacity to meet market demand has demonstrated strength to support the expected exceptional performance in the year. The possibility of the company surpassing the estimated EPS of N10 is high. This will make the company rank among the highest earners in the market.

In course of the pre-election correction in the market Traders that want to protect investable capital hold position in defense equity like 7-Up and watch the general market trend. As the market expects it full year result, the possibility of 20 percent  return is high as price action is above 50 days moving average. This is serious tops trading with momenturn indicators.    

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