BERGER PAINTS NIGERIA PLC

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1 NSE: BERGER; Bloomberg: BERGER NL BERGER PAINTS NIGERIA PLC Declining Profitability Threatens Shareholder Value In its recently released annual scorecard, Berger Paints Nigeria Plc. declared revenue of NGN3.08bn, representing a 13.72% growth in turnover from FY2013. Breakdown of revenue into quarters showed 60.72% growth in stand-alone revenue for Q4:2014 relative to Q4:2013. We consider this a major feat for the paint company, as BERGER had suffered a significant slowdown in demand in the first three quarters of 2014, having posted a 5.37% Year-on-Year (YoY) decline in turnover as at Q3:2014. Owing to greater YoY revenue, cost of sales came in 11.11% higher compared to the erstwhile period. The company however sustained its recent production cost efficiency drive, as cost to sales ratio settled lower at 56.31% from 57.64% in FY2013. Operating expense on the other hand, grew by 27.97% largely due to a 53.77% increase in selling and distribution expenses. Profit after tax (PAT), which amounted to NGN0.15bn (42.23% lower YoY), was also pressured by higher finance and taxation expenses during the period. Using a blend of absolute and relative valuation models, we arrived at a 2015 target price of NGN8.19 (as against previous TP of NGN8.48). This implies that the stock is trading at a 9.03% premium to our target price, hence we recommend a HOLD. 4 th quarter sales drive YoY revenue growth for 2015: BERGER grew its top line by 13.72% to NGN3.08bn in FY2014. The company recorded stand-alone turnover of NGN1.27bn in Q4:2014 as against NGN0.054bn in Q3:2014. This suggests that Berger enjoyed relatively higher demand, and possibly increased production volumes in the last quarter. We are of the opinion that the company may not have reached its optimal production potential and may still be struggling with production inefficiency and sub-optimal capacity utilisation in its old factory plants. We believe that the introduction of the proposed automated factory in 2015 will help cut down wastages, increase supply and help the company tap into the growing demand for building materials such as paints, in the medium to long term. Given the expected slowdown in construction activities in 2015, owing to reduced government and consumer spending, we pegged 2015 paint sales at NGN3.30bn, implying a YoY growth of 7%. We expect the lower growth level to be driven by consumer loyalty, improved factory efficiency and the growing distribution network. Selling and distribution expenses impede cost efficiency drive: FY2014 numbers showed a slower growth in cost of sales of 11.11% relative to revenue growth, which resulted in a cost margin of 56.31% in the period versus 57.64% in the previous year. We attribute the cost savings to stable prices of key raw materials and reduced dependence on alternative power. Operating expense, on the other hand, continued to spike, as operating expense ratio settled higher at 37.62% compared to 33.43% in erstwhile year. This could be traced to the 53.77% increase in selling and distribution expenses as BERGER worked to increase product visibility and access to consumers. We envisage continued growth in operating expenses as the company expands its distribution network while production costs are expected to further moderate with improvement in production efficiency. We therefore forecast OPEX to sales and cost to sales ratios at 40.1% and 56.1% respectively. PAT drops 42.23% YoY despite growth in revenue. The paint maker reported profit after tax of NGN149mn, 42.23% down from FY2013. In addition to higher operating costs, PAT was also pressured by a 38.26% increase in finance costs coupled with a higher tax rate (40.3% vs 24.9% in 2013) in FY2014 EARNINGS UPDATE TP NGN8.19 Rating: HOLD Key Metrics Current price 9.00 Current TP 8.19 Actual P/E 12.27x Forward P/E 12.73x Fundamental Key Metrics EPS 0.51 BVPS 8.49 Net Margin 4.83% ROAE 6.03% ROAA 4.10% Leverage 1.48 Key Price Metrics Today s change 0.00% WtD 0.00% MtD 13.25% QtD 13.25% YtD 0.67% 52-Week Return -5.84% 52-Week Hi Week Lo 7.60 Year Hi Year Lo 8.00 Beta Week Share Price Trajectory 1.60 NSE ASI BERGER M-14 M-14 J-14 S-14 N-14 J-15 M-15 Source: NSE, Bloomberg, Meristem Research Analyst: Adetutu Adegbayibi adetutuadegbayibi@meristemng.com

2 Following the massive decline in PAT, Net margin moderated to 4.8% from 9.5% in Other key indicators also reflected the decline in profitability as earnings per share fell to NGN0.51 from 0.89 with Return on Equity decreasing to 6.03% from 12.23% in prior year. Given our outlook on 2015 revenue coupled with expectations of production efficiency, we forecast PAT of NGN0.186bn indicating a 25.3% YoY growth in PAT. Recommendation remains a HOLD: Using our blend of absolute and relative valuation models, coupled with our expectations of slower economic growth, higher costs and risky operating environment, we arrived at a 2015 target price of NGN8.19 (as against previous TP of 8.48) which suggests that the stock is currently trading at a 9.03% premium to target price, and we maintain our HOLD recommendation. Trend in Revenue and Revenue growth Trend in PAT and PAT growth Millions 5,000 4,000 3,000 2,757 2,000 1,000 Turnover 2,574 2,711 2,514 3,083 Turnover Growth 3,955 3,596 3,299 4,351 20% 15% 10% 5% 0% -5% Millions PAT PAT Growth % 40% 20% 0% -20% -40% f 2015f 2016f 2017f 2018f -10% f 2015f 2016f 2017f 2018f -60% Source: Company results, Meristem Research Financial Highlights (NGN billion) BERGER PAINTS NIGERIA PLC FY:2014 Result Profit & Loss Account FY:2014 FY:2013 y/y Growth FY2015 Revenue % Cost of Sales % Gross Profit % OPEX % Other Income % Finance Costs % Investment Income % PBT % PAT % Balance Sheet Inventories % Trade and Other Receivables % Cash and bank % Total Assets % Shareholders' fund % Short term borrowings % Ratios RoAE 6.03% Dividend NGN0.75 RoAA 4.10% Closure Date 15th -17th June 2015 Financial Leverage 1.48 AGM Date 21st July 2015 Cost of Sales Margin 56.31% Payment Date 23rd July 2015 Net Margin 4.83% Dividend Yield 8.33%

3 Analyst s Certification and Disclaimer This research report has been prepared by the research analyst(s), whose name(s) appear(s) on the cover of this report. Each research analyst hereby certifies, with respect to each security or issuer covers in this research that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers (the Issuer); and (2) no part of any of the research analyst s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Research analysts compensation is determined based upon activities and services intended to benefit the investor clients of Meristem Securities Limited (the Firm). Like all of the Firm s employees, research analysts receive compensation that is impacted by overall Firm profitability, which includes revenues from other business units within the Firm. (3) each research analyst and/or persons connected with any research analyst may have interacted with sales and trading personnel, or similar, for the purpose of gathering, synthesizing and interpreting non-material non-public or material public market information. As at the date of this report, any ratings, forecasts, estimates, opinions or views herein constitute a judgment, and are not connected to research analysts compensations. In the case of non-currency of the date of this report, the views and contents may not reflect the research analysts current thinking. This document has been produced independently of the Issuer. While all reasonable care has been taken to ensure that the facts stated herein are accurate and that the ratings, forecasts, estimates, opinions and views contained herein are fair and reasonable, neither the research analysts, the Issuer, nor any of its directors, officers or employees, shall be in any way responsible for the contents hereof, and no reliance should be placed on the accuracy, fairness or completeness of the information contained in this document. No person accepts any liability whatsoever for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. Analysts Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Investment Banking. Investment Ratings Fair Value Estimate We estimate stock s fair value by computing a weighted average of projected prices derived from discounted cash flow and relative valuation methodologies. The choice of relative valuation methodology (ies) usually depends on the firm s peculiar business model and what in the opinion of our analyst is considered as a key driver of the stock s value from a firm specific as well as an industry perspective. However, we attach the most weight to discounted cash flow valuation methodology. Ratings Specification BUY: HOLD: SELL: Fair value of the stock is above the current market price by at least 20 percent Fair value of the stock ranges between -10 percent and 20 percent from the current market price. Fair value of the stock is more than 10 percent below the current market price. Definitions Price Targets: Price targets reflect in part the analyst s estimates for the company s earnings. The achievement of any price target may be impeded by general market and macroeconomic trends, and by other risks related to the company or market, and may not occur if the company s earnings fall short of estimates. Asset allocation: The recommended weighting for equities, cash and fixed income instrument is based on a number of metrics and does not relate to a particular size change in one variable.

4 Movements in Price Target Company Name: BERGER Date Price (N) Previous Target Price(N) New Target Price (N) Previous Recommendation 07/04/ HOLD HOLD New Recommendation Company disclosures Meristem or the analyst(s) responsible for the coverage may have financial or beneficial interest in securities or related investments discussed in this report, which could, unintentionally, affect the objectivity of this report. Material interests, which Meristem or the analyst(s) have with companies or in securities discussed in this report, are disclosed below: Company Berger Paints Plc Disclosure k a. The analyst(s) hold(s) personal positions (directly or indirectly) in a class of the common equity securities of the company. b. The analyst responsible for this report, as indicated on the front page, is a board member, officer or director of the company c. Meristem beneficially owns 1% or more of the equity securities of the company d. Meristem has been the lead manager or co-lead manager of any publicly disclosed offer of securities of the company over the past 12 months. e. Meristem beneficially holds a major interest in the debt of the company f. Meristem has received compensation for investment banking activities from the company within the last 12 months g. Meristem intends to seek, or anticipates receipt of compensation for investment banking services from the company in the next 3 months h. The content of this research report has been communicated with the company, following which this research has been materially amended before its distribution i. The company is a client of the stock broking division of the Meristem group. j. The company is a client of the investment banking division of the Meristem group. k. The company is a client/prospective client of other divisions of the Meristem group. l. The company owns more than 5% of the issued share capital of Meristem m. Meristem has other financial or other material interest in the company.

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