NSE: BERGER; Bloomberg: BERGER NL BERGER PAINTS NIGERIA PLC On The Verge Of Sustainable Growth Amid Stifling Expenses Berger Paints Nigeria Plc recently released its 2013FY score sheet growing its turnover by 8% YoY (vs. 2% 5-year CAGR), which we attribute to the company s repositioning initiatives which included a partnership with KCC corporation of south Korea to distribute marine/protective coatings. Cost of production increased by 6.72% though cost to sales ratio declined by 0.58%, bringing 2013FY cost-tosales to 60.55%. Operating expenses grew 17% even as OPEX margin advanced to 37% in 2013FY fuelled by a 19% increase in administrative expenses. Earnings settled at 31% over 2012FY figures driven by NGN0.038bn gain from the disposal of Robbialac, a prior subsidiary of Berger paints. The company proposed DPS of NGN0.70k implying 7.78% dividend yield at the current price level. We maintain our HOLD recommendation on the counter though we revised our 12-M target price upwards from NGN9.84 to NGN10.14. Inconsistent Turnover Growth over the Years Due To Increased Competition: BERGER s current growth in turnover comes after two consecutive years of decline in top line. In 2013 however, the company set in motion strategic initiatives aimed at repositioning BERGER as a major player in the chemical and paints industry. We expect Berger paints to sustain revenue growth in 2014 even as it completes its fully automated factory, establishes its presence in the marine sector on the back of the KCC partnership while also improving its distribution network. As such, we project 2014FY revenue of NGN3.001bn, indicating 11% YoY growth. Disposal of Subsidiary Improves Earnings Profile: The Company s 2013FY PAT came in at NGN0.251bn from NGN0.192bn in 2012FY, despite OPEX of NGN1.005bn, largely due to the NGN0.038bn gain from the sale of Robbialac Paints which had previously contributed negative earnings. Cost of sales advanced 6.72% YoY owing to the industry-wide challenge of raw material importation. We however expect cost-to sales ratio to marginally decline to 60% in 2014 from c.61% in 2013 given expected cost savings from utilising a more efficient production facility. OPEX remained on the rise, growing by 16.42% in 2013FY due to administration expenses. We do not see a moderation in OPEX as growth in administrative expense continues to be a challenge. thus, we forecast OPEX growth of 39% by 2014FY from 37.10% in 2013 which would slightly drag 2014FY earnings to NGN0.250bn from NGN0.251bn as income from sale of subsidiary is a one-off item. Target Price Revised Upwards As Growth Prospects Improve: Payout ratio dropped to 60.5% from 79.2% in 2012 even as Berger Paints proposed DPS of NGN0.70K for the fourth consecutive year implying a dividend yield of 7.7% at current price level. We believe BERGER intends to maintain dividend at NGN0.70k until it achieves sustainable growth. Owing to continued commitment at repositioning the company through strategic initiatives, we think BERGER has the potential of sustaining growth, hence a slight modification of our assumptions. Using a blend of absolute and relative valuation models, our target price was reviewed upward to NGN10.14 from N9.84 indicating a 12.69% upside at the current price. We however maintain our HOLD recommendation. Target Revised as top line growth prospects 2013FY EARNINGS UPDATE TP NGN10.41 Rating: HOLD Key Metrics Current price 9.00 Current TP 10.41 Actual P/E 10.34x Forward P/E 12.00x Fundamental Key Metrics EPS 0.87 BVPS 8.40 Net Margin 8.30% ROAE 12.05% ROAA 5.01% Asset Turnover 0.77x Leverage 1.53 Mkt. Cap (bn) 1.512 Key Price Metrics Today s change 0.00% WtD 9.83% MtD 9.83% QtD 9.83% YtD 18.75% 52-Week Return 18.7% 52-Week Hi 11.38 52-Week Lo 6.82 Year Hi 9.92 Year Lo 8.0 Beta 0.10 52-week share price Trajectory 26 BERGER 21 16 11 6 1 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 NSE, Bloomberg, Meristem Research Analyst: Adetutu Adegbayibi adetutuadegbayibi@meristemng.com
Trend in turnover and turnover growth vs. forecast Trend in PAT and PAT growth vs. forecast Millions 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Turnover Turnover Growth 20% 15.8% 15% 11.0% 7.7% 9.0% 10% 9.0% 5% 0% -2.4% -5% -6.6% -10% 2010 2011 2012 2013 2014f 2015f 2016f Millions 500 450 400 350 300 250 200 150 100 50 0 PAT PAT Growth 20% 15% 15.8% 11.0% 10% 9.0% 9.0% 7.7% 5% 0% -2.4% -5% -6.6% -10% 2010 2011 2012 2013 2014f 2015f 2016f Financial Highlights (NGN billion) BERGER PAINTS Plc FY2013 Profit & Loss Account FY 2013 FY 2012 2014f Turnover 2.708 2.514 3.006 Cost of Sales 1.640 1.537 1.804 Gross Profit 1.069 0.977 1.175 Other Income 0.287 0.197 0.192 OPEX 1.005 0.863 0.313 PBT 0.356 0.284 0.368 PAT 0.251 0.192 0.250 Balance Sheet Property, plant and equipment 1.406 1.164 1.436 Inventories 0.512 0.538 0.541 Debtors/Receivables 0.295 0.217 0.301 Cash and bank 1.138 0.749 0.835 Other Assets 0.185 0.180 0.227 Total Assets 3.537 2.848 3.340 Shareholders' fund 2.436 1.735 2.360 Total Liabilities 1.101 1.113 0.980 Price multiples/ratios Source; NSE, Meristem Research Corporate Actions Shares Outstanding 0.217 Proposed Dividend 0.70k RoAE 12.05% Dividend Yield 7.77% RoAA 7.87% Payout Ratio 80.70% Cost of Sales Margin 60.55% Gross Profit Margin 39.45% OPEX Margin 37.10% Net margin 9.28%
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Movements in Price Target Company Name: BERGER Date Price (N) Previous Target Price(N) New Target Price (N) Previous Recommendation 4/04/2014 9.00 9.84 10.14 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. 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.
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