Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 SEVEN-UP BOTTLING COMPANY PLC NSE: 7UP l Bloomberg 7UP NL 2015H1 EARNINGS UPDATE Strong with Enviable Performance though Overvalued In line with company s recent performance, Seven-Up Bottling Company Plc., posted another impressive numbers in its 2014/15H1 result with growth recorded in top and bottom lines. Revenue grew Year on Year (YoY) by 12.76% to peg at NGN38.142bn relative to the previous level of NGN33.825bn though declined by 18.65% (in line with half year historical experience) when analysed quarter on quarter (QoQ) as half year standalone stood at NGN17.109bn vs. 2015Q1: NGN21.033bn. Major cost items remain largely modest in line with historical cost structure as the cost to sales and OPEX ratios respectively pegged at 62.92% (vs. 2014H1: 62.61%) and 26.48% (vs. 2014H1: 27.07%). Finance charge however surged YoY by 15.01% with debt to equity remaining high at 2.18x while leverage ratio pegged at 3.18x. Earnings after tax however grew stronger YoY by 15.04% (NGN2.480bn vs. NGN2.156bn in the corresponding quarter). Using a blend of absolute and relative valuation, we arrived at our current target price of NGN104.79 implying a 34.51% discount to the current market price of NGN160.00. Hence, we revise our recommendation to a SELL from HOLD. Revenue Growth Remains Enviably Strong: 7UP has continually posted fantastic results in the last ten quarters with increasingly strong growth momentum. The company recorded an impressive turnover growth of 12.76% YoY as revenue settled at NGN38.142bn relative to NGN33.825bn in the previous corresponding quarter. However, when analysed on a QoQ basis, 7UP s turnover dipped by 18.65% pegging at NGN17.109bn for 2015H1 relative to 2015Q1 figure of NGN21.033bn. We attribute company s continued strong performance to its strategic position in the carbonated soft drink industry as well as the company s recent newer product lines which is driving volume. Hence, we forecast a 2014/15FY revenue growth of 8.89%. Major Cost Items Remain Stable: Analysis of the current result clearly shows that the major cost items are still largely in line with historical pattern. Cost of sales ratio inched higher marginally to 62.92% from 62.61% in the corresponding quarter and 62.46% 5-year historical average. Similarly, operating expense ratio declined slightly to 26.48% relative to 2014H1: 27.07% and 5-year historical average of 25.61%. Finance charge however surged YoY by 15.01% sitting at NGN0.862bn vs. NGN0.750bn in the corresponding quarter. Earnings grew impressively by 15.04% to settle at NGN2.480bn relative to the previous level of NGN2.156bn. As such, given the higher base of 2013/14FY, we forecast a modest 2014/15FY earnings of NGN5.566. We revised our Recommendation to SELL : We adjusted our revenue projection for this current financial year to 8.82% from 18% and with a blend of absolute and relative valuation arrived at our intrinsic price. We employed the DDM absolute valuation as well as price multiples valuation (using average P/E over 5-year period and justified leading P/E). Our target price is revised downward to NGN104.79 from the previous NGN105.56 implying a 34.51% discount to the current price of NGN160 and as such we revise our recommendation to a SELL from HOLD. Given the relative illiquidity of 7UP and the recent positive numbers, positive market sentiment has moved the stock to the oversold region. We advise investors to stay cautious in taking position with 7UP at the current price. Target Price: Rating: NOVEMBER 2014 Relative Metrics Current price 160.00 P/E ttm 15.16x P/B 5.63x Forward P/E 18.41x Forward P/Bv 5.08x Dividend Div. Yield NA NA 52-Wk av. Vol (mn) 0.082 Fundamental Metrics Trailing EPS 10.55 BVPS 28.42 Net Margin 6.50% ROAE 38.04% ROAA 11.89% ttm Asset Turnover 1.42x Leverage 3.18x Mkt. Cap (N bn) 102.495 Key Price Metrics Today Return -3.03% WtD Return -3.03% MtD Return -3.03% QtD Return 8.31% YtD Return 124.09% 52-Week Return 135.29% 52-Week Hi 188.52 52-Week Lo 68.00 Year Hi 188.52 Year Lo 71.40 Beta -0.05 14D-RSI 51.702 2.60 2.40 2.20 2.00 1.80 1.60 1.40 1.20 1.00 0.80 NSEASI Analyst: Robert Omotunde NGN104.79 SELL 7UP robertomotunde@meristemng.com 1 P a g e
Financial Highlights (NGN billion) SEVEN UP BOTTLING CO PLC:2015H1 UNAUDITED Result Profit & Loss Account 2015:H1 2014:H1 y/y Growth 2015f Revenue 38.142 33.825 12.762% 84.758 Cost of Sales 24.001 21.178 13.33% 52.940 Gross Profit 14.141 12.647 11.81% 31.818 OPEX 10.100 9.156 10.32% 20.520 Other income 0.052 0.043 22.91% 0.051 Operating Profit 4.093 3.534 15.82% 11.349 Finance Costs 0.862 0.750 15.01% 2.164 PBT 3.231 2.784 16.04% 8.185 PAT 2.480 2.156 15.04% 5.566 Balance Sheet Fixed Assets 41.856 37.894 11.40% 42.546 Inventories 10.155 9.460 7.34% 11.693 Trade debtors and other Receivables 1.993 2.840-29.81% 5.053 Cash at bank and in hand 3.159 4.919-35.77% 4.777 Other Assets 0.662 0.751-11.78% Total Assets 57.826 55.863 3.51% 64.211 Shareholders' fund 18.207 17.329 5.07% 20.192 Trade Creditors and other Payables 13.941 13.966-0.18% 4.631 Loans and borrowings: Short term 7.917 1.433 452.26% Loans and borrowings: long term 8.435 14.371-41.30% Total Liabilities 39.619 38.535 2.81% 44.019 Per share data 7UP Current Price 160.00 Trailing EPS 10.55 BVPS 28.42 Price multiples/ratios Shares Outstanding 0.64 P/E 15.16x 18.41x P/BV 5.63x 5.08x RoAE 38.04% 29.67% RoAA 11.89% 9.27% Financial Leverage 3.18 3.22 3.18x Cost of Sales Margin 62.92% 62.61% 62.46% Gross Profit Margin 37.08% 37.39% 37.54% OPEX Margin 26.48% 27.07% 24.21% Operating Profit Margin 10.73% 10.45% 13.39% Net margin 6.50% 6.37% 6.57% 2 P a g e
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. Important Disclosure 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. Legal entity disclosures: Meristem Securities Limited is a member of The Nigerian Stock Exchange and is authorized and regulated by the Securities and Exchange Commission to conduct investment business in Nigeria. For U.S. persons only: This research report is a product of Meristem Securities, which is the employer of the research analysts who has prepared the research report. The research analysts preparing the research report are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analysts are not subject to supervision by a U.S. broker-dealer, and are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Meristem Securities only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Meristem Securities has entered into an agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo"). Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer. 3 P a g e
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 P a g e
Movements in Price Target Company Name: Seven-Up Bottling Company Plc Date Price (N) Previous Target Price(N) New Target Price (N) Previous Recommendation 04/11/2014 160.00 105.56 104.79 HOLD SELL 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 Seven-Up Bottling Company Plc Disclosure 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 owns more than 5% of the issued share capital of Meristem l. Meristem has other financial or other material interest in the company. Conflict of Interest It is the policy of Meristem Securities Limited and its subsidiaries and affiliates (Individually and collectively referred to as Meristem ) that research analysts may not be involved in activities that suggest that they are representing the interests of Meristem in a way likely to appear to be inconsistent with providing independent investment research. In addition, research analysts reporting lines are structured so as to avoid any conflict of interests. For example, research analysts are not subject to the supervision or control of anyone in Meristem s Investment Banking or Sales and trading departments. However, such sales and trading departments may trade, as principal, on the basis of the research analysts published research. Therefore, the proprietary interests of those Sales and Trading departments may conflict with your interests. 5 P a g e
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