equity research: cap plc · mix of equity and liabilities in the ratio of 39.84% and 60.16%...

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Equity Research: CAP Plc

Table 1: HOLD

Current Price 37.05

Fair Value 38.16

HHYY EEnnddeedd JJuunnee 3300,, 22001155

Growing Through Innovative Distribution 1.0 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%.

Table 2: Financial Performance (N’mn)

HY 2015 HY 2014 Change FY 2014

T/O 3,558 3,349 6.24% 6,988

EBIT 1,164 1,013 14.87% 2,284

PBT 1,273 1,095 16.19% 2,442

PAT 868 745 16.56% 1,662

The turnover in HY June 30,

2015 increased by 6.24% to

N3.56bn.

The company’s profit margins

improved in HY 2015.

Thursday, Sep. 10, 2015

Equity Research Report

CAP Plc

FSDH Merchant Bank

2 FSDH Research www.fsdgroup.com

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.

Table 4: Profitability Margins

Q2 2015 FY 2014 Q2 2014

GP* Margin 52.63% 51.49% 51.23%

EBIT Margin 32.71% 32.68% 30.26%

PBT Margin 35.77% 34.95% 32.71%

PAT Margin 24.40% 23.79% 22.24%

*GP – Gross Profit

Table 3: Quarterly Result Highlights (N'mn)

Q2 2015 Q1 2014 Q4 2014 Q3 2013 Q2 2014

Turnover 1,750 1,808 1,934 1,705 1,602

PBT 558 715 782 564 503

PAT 383 486 534 384 342

Given the run rate, the company is expected to exceed its previous year’s performance.


CAP Plc

FSDH Merchant Bank


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.

The total assets were financed by a mix of equities and liabilities in the ratio of 39.84% and 60.16% respectively.

Equity,39.84%

Financing Mix

Equity

Liabilities

Liabilities,

60.16%


CAP Plc

FSDH Merchant Bank


1.1 FY 2014 Performance Analysis:

As at FY 2014, turnover increased by 12.78% to N6.99bn, compared with N6.20bn

recorded in the corresponding period of 2013. The administrative, selling and distribution

expenses increased by 3.15% to N1.28bn in FY 2014 as the company continued with its

cost control measures. The company recorded an increase of 25.87% in its finance income

to N158.24mn in FY 2014 from N125.96mn in 2013. The Profit Before Tax (PBT) grew to

N2.44bn, an increase of 17.02% from N2.09bn recorded in the corresponding period of

2013. The tax provision increased by 16.34% to N779.72mn from N670.20mn, leading to a

Profit After Tax (PAT) of N1.66bn in FY 2014 from N1.42bn in the corresponding period of

2013, representing an increase of 17.34%.

As at FY 2014, all profit margins increased over the FY 2013 figures. The Gross Profit

margin grew to 51.49% from 50.92% in FY 2013 while the Earnings Before Interest and

Tax (EBIT) margin rose to 32.68% from 31.65% in FY 2013.The PBT margin increased to

34.95% in FY 2014 from 33.68% as at FY 2013. Also, the PAT margin stood at 23.79%, up

from 22.87% in the corresponding period of 2013.

Table 5: Financial Performance (N’bn)

FY 2014 FY 2013 Change T/O 6.99 6.20 12.78% EBIT 2.28 1.96 16.45% PBT 2.44 2.09 17.02% PAT 1.66 1.42 17.34%

As at FY 2014, all profit

margins increased over

the FY 2013 figures.

The company recorded

an increase of 25.87% in

its finance income to

N158.24mn in FY 2014

from N125.96bn in 2013.

Q2 2011 Q2 2012 Q2 2013 Q2 2014

Revenue 2.53 2.88 3.35 3.56

0.000.501.001.502.002.503.003.504.00

Q2 Revenue Trend (N'bn)


CAP Plc

FSDH Merchant Bank


2.0 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.

2.1 Strategic Focus:

The company plans to engage in further sales of its paint products in a bid to improve its

availability as well as popularity in the Nigerian market. UAC (parent company of CAP)

concluded its acquisition of Portland paint and Product in 2013, which currently targets the

lower end of the market while, Dulux paint the flagship brand for CAP, targets the upper

and premium end of the market. This strategic acquisition presents UAC with increased

market penetration aimed at further boosting its top line beyond that of its competitors. The

company seems to maintain its margins within reasonable levels as stated in its mission

statement with great success in recent time.

The company plans to

engage in further sales of its

paint products in a bid to

improve its availability as

well as popularity in the

Nigerian market.


CAP Plc

FSDH Merchant Bank


3.0 Business: Chemical and Allied Products Plc evolved from the world-renowned British multinational

Imperial Chemical Award Industries Plc, which formalized its Nigerian operations in 1957

under ICI Exports Limited. CAP a fully owned Nigerian Company is a subsidiary of UAC of

Nigeria and a participant of the U.N Global Compact initiative. It is a major player in the

coating business and is involved in manufacturing and distribution of a wide array of quality

coating and painting products. The company provides a wide base of products to

consumers through its two mainstream brands being Dulux and Caplux.

3.1 Distribution Channels

3.1.1 Dulux Colour Centre Concept

Dulux is strategically distributed through Dulux Colour Centres (DCCs) as its Primary

distribution channel. Dulux Colour Centre is an innovative strategy introduced to bridge the

gap between Dulux and its consumers. CAP pioneered the Colour Centre concept in

Nigeria in the year 2005 which began a revolution in the Nigerian paint industry; currently,

there are over 20 DCCs across major cities with a plan to rapidly gain more markets.

3.1.2 Dulux Mobile Colour Centre

Dulux Mobile Colour Centre is a mobile sales outlet that was introduced to get the brand

closer to the target consumers. This mobile outlet also serves as experiential marketing

tool; customers get same offerings as they will get from the company’s main distribution

channel (Dulux Colour Centre).

Table 6: The Shareholding Structure

Shareholder No. of Ordinary Shares Held Proportion

UAC of Nigeria 350,652,700 50.09%

Other shareholders - Individuals and Institutions 349,347,300 49.91%

Total 700,000,000 100.00%

Dulux Colour Centre is an

innovative strategy

introduced to bridge the

gap between Dulux and its

consumers and provides

an adequate platform for

the distribution of CAP Plc

products.

Dulux is strategically

distributed through Dulux

Colour Centres (DCCs) as

its Primary distribution

channel.


CAP Plc

FSDH Merchant Bank


Table 7: Company Summary

Ticker CAP

Sector INDUSTRIAL GOODS

Sub-sector Building Materials

Date of Incorporation August 25,1969

Date of Listing May 24,1978

Financial Year End December

Number of Fully Paid Share 700,000,000

Current Capitalization(NGN) 25,935,000,000.00

NSE Capitalization (NGN) 9,493,603,556,615.24

% of NSE Capitalization 0.26%

52 Week high NGN 43.99

52 Week low NGN 34.00

YTD Return (%) 1.07

52 Weeks Average Volume Traded 106,611

Trailing EPS NGN 2.55

Trailing P/E Ratio (X) 14.53

Price as at September 08, 2015

Table 8: Directors’ Shareholding as at December 31, 2014

Directors Total Shareholding Position Mr Larry Ettah 4,083,332 Chairman Mrs Omolara Elemide 128,635 Managing Director Mrs Adeline Ogunfidodo 17,337 Finance Director Mr. Opeyemi Agbaje 62,332 Non-Executive Mr. Solomon Aigbavboa 57,330 Non-Executive Ambassador Kayode Garrick 1,215 Non-Executive


CAP Plc

FSDH Merchant Bank


4.0 Product Analysis CAP operations include the manufacture and distribution of premium paint and coating

products. The company owns two main brands with each brand with their individual sub

products made to suit the decorative and protective requirements of its customers. These

brands are Dulux and Caplex.

4.1 Dulux

Dulux is known to be the leading authority in decorative paint segment and as such has

always been associated with innovation and quality. This is the company’s flagship brand

and remains popular amongst all paint users both commercially and individually. The brand

is a premium quality paint or coating that often provides an exceptional combination of

durability and beauty. This paint exists in a number of textures and colours for specialised

finishing such as: Dulux Emulsion finishing, Emulsion Silk finishing, Dulux Gloss finishing,

Textured finishing, Dulux Weatherfield, Dulux Eggshell, Dulux Primer and Dulux trade (

exists in Ecosure, Vinyl Silk, Vinyl Matt, Vinyl Soft sheen, Eggshell, High gloss,

Weathersfield masonry and special effect paint). Other major competing products include:

Texcote, Luxol and Super Star produced by Berger Paints and others. The brand also has

its own Hammerite metal paint for painting on metals.

4.2 Caplux

Caplux paints is a more affordable brand with similar quality to that of the Dulux brand.

Caplux brand currently exists a range of specialised coating textures such as: Emulsion

finishing, Gloss finishing, Textured finishing. Some competing brand products include wall

Statin by DN Meyer, Luxor Emulsion and Clinstay by Berger Paints.

CAP operations include the

manufacture and distribution

of premium paint and coating

products.

Dulux is known to be the

leading authority in

decorative paint segment

and as such has always

been associated with

innovation and quality.

Caplux paints is a more

affordable brand with similar

quality to that of the Dulux

brand.

http://bergerpaintsnig.com/decorative.php



CAP Plc

FSDH Merchant Bank


4.3 Fire Protection

CAP operations also include the manufacture and distribution of fire protection coatings

and fire extinguishers. A competing brand is Berger paint’s Fire Retardant Texcote.

Table 9: SWOT Analysis

Strengths Weaknesses

Strong profit margins.

Consistent profitability.

Strong brand name.

Stable and effective management.

Indigenous operator.

Strong partnership with UPDC.

Technological license of AkzoNobel (world’s

largest paint producer).

Declining revenue growth.

Limited room for diversification.

Almost neglect of the middle and low

income earners

Opportunities Threats

Limited competition in premium end of the

market.

Increasing demand for housing and building.

Large market in both Nigeria and West African

Region.

Declining foreign exchange rate.

Unstable macroeconomic environment.

Strong competition from operators focussing

on the lower end of the market.

Adulterated products in the Nigerian market.



CAP Plc

FSDH Merchant Bank


`

5.0 Forecast:

Our Forecast Drivers

We considered the following factors in arriving at our 5-year forecasts:

Positive Factors:

The company’s dominant position in the premium paint and coating segment.

Strong alliance with UPDC.

Ample potential for growth in the real estate market.

The company’s consistent high profit margins.

Superior product brand name in the market.

Negative Factors:

Foreign exchange exposure and risk.

The weak consumers spending power.

Unstable macroeconomic environment.

Existence of substandard products in the market.

Taking the foregoing factors into consideration, we believe that the positive forecast drivers

overweigh the negative factors. Hence, we estimate Turnover of N7.53bn, N8.45bn,

N10.07bn, N11.90bn and N14.01bn for the periods ending December 2015, 2016, 2017,

2018 and 2019 using a revenue growth rate of 7.71% for 2015, 12.21% for 2016, 19.21%

for 2017, 18.21% for 2018 and 17.71% for 2018. We estimate an EBIT of N2.56bn,

N2.91bn, N3.50bn, N4.21bn and N4.63bn, and EBITDA of N2.70bn, N3.11bn, N3.83bn,

N4.77bn and N5.61bn for the same period using EBIT margins of 34.03%, 34.42%,

34.80%, 35.41% and 33.06% respectively, and EBITDA Margins of 35.85%, 36.85%,

38.05%, 40.05% and 40.05% respectively. Our PBT forecasts for the periods are: N2.73bn,

N3.08bn, N3.69bn, N4.41bn and N4.83bn. Adjusting for tax, our PAT forecasts are

N1.86bn, N2.10bn, N2.51bn, N3.01bn and N3.30bn. Our forecast PAT Margin for the

period are 24.72%, 24.89%, 24.98%, 25.25% and 23.53% respectively. The 2015 forward

Earnings Per Share (EPS) based on profit attributable to ordinary shareholders is N2.66

while the forecast Dividend Per Share (DPS) is N2.50 based on dividend payout of

94.10%.

Our 2015 forward Earnings

Per Share (EPS) is N2.66


CAP Plc

FSDH Merchant Bank


Table 10: FSDH Research Ration Analysis for CAP Plc (2015 - 2019)

Profit and Loss =N='bn Dec-15 Dec-16 Dec-17 Dec-18 Dec-19

Turnover (Net Sales) 7.53 8.45 10.07 11.90 14.01

Cost of Sales (3.55) (3.90) (4.53) (5.12) (6.02)

Gross Profit 3.97 4.54 5.54 6.78 7.98

Administrative Expenses (0.78) (0.87) (1.04) (1.23) (1.45)

Depreciation (0.14) (0.21) (0.33) (0.55) (0.98)

Other Operating Income 0.06 0.07 0.08 0.09 0.11

EBIT 2.56 2.91 3.50 4.21 4.63

EBITDA 2.70 3.11 3.83 4.77 5.61

Net Finance Income 0.17 0.17 0.18 0.19 0.20

PBT 2.73 3.08 3.69 4.41 4.83

Taxation (0.87) (0.98) (1.17) (1.40) (1.54)

PAT 1.86 2.10 2.51 3.01 3.30

Table 11: FSDH Research Ratio Analysis for CAP Plc (2015 - 2019)

Dec-15 Dec-16 Dec-17 Dec-18 Dec-19

EBITDA Margin 35.85% 36.85% 38.05% 40.05% 40.05%

EBIT Margin 34.03% 34.42% 34.80% 35.41% 33.06%

PBT Margin 36.24% 36.49% 36.62% 37.03% 34.50%

PAT Margin 24.72% 24.89% 24.98% 25.25% 23.53%

EPS(N) 2.66 3.00 3.59 4.29 4.71

DPS(N) 2.50 2.83 3.38 4.04 4.43

Dividend Payout 94.10% 94.10% 94.10% 94.10% 94.10%

Earnings Yield * 6.96% 7.87% 9.41% 11.25% 12.34%

Dividend Yield * 6.55% 7.40% 8.86% 10.59% 11.61%

P/E Ratio* 14.36 12.71 10.62 8.89 8.10

Number of Shares (‘bn) 0.70 0.70 0.70 0.70 0.70

ROCE 174.20% 159.59% 148.56% 140.58% 133.62%

ROE 133.27% 120.30% 110.10% 102.82% 97.20%

Collection Days (Days) 3.51 3.51 3.51 3.51 3.51

Payment Days (Days) 19.52 19.52 19.52 19.52 19.52

Inventory Turnover 4.51 4.51 4.51 4.51 4.51

Asset Turnover 1.56 1.53 1.51 1.48 1.56

Current Ratio 1.29 1.33 1.36 1.36 1.27

Quick Ratio 1.05 1.09 1.13 1.13 1.03

*At Our Fair Value of N38.16


CAP Plc

FSDH Merchant Bank


Table 12 : Comparable Analysis FY 2014 (Nbn)

Company CAP Berger Portland

Turnover (Net Sales) 6.99 3.08 2.80

Gross Profit 3.60 1.35 1.31

EBIT 2.28 0.27 0.30

PBT 2.44 0.25 0.19

PAT 1.66 0.15 0.15

GP Margin 51.49% 43.69% 46.67%

EBIT Margin 32.68% 8.64% 10.88%

PBT Margin 34.95% 8.09% 6.94%

PAT Margin 23.79% 4.83% 5.31%

ROE 140.81% 6.05% 16.08%

Net Assets 1.18 2.46 0.92

Net Assets Per Share 1.69 8.49 2.31

PE Ratio 12.93x 10.91x 39.19x

Earnings Yield 6.88 7.73 2.55

As at September 08,2015


CAP Plc

FSDH Merchant Bank


6.0 Valuation:

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.

The fair value for CAP Plc is N38.16.


CAP Plc

FSDH Merchant Bank


For enquiries please contact us at our offices: Lagos Office: 5th-8th floors UAC House, 1/5 Odunlami Street, Lagos. Tel: 234-1-2702881-2. Port Harcourt Office: Mainstreet Bank Building, (2nd floor, 5 Trans Amadi Road, Port Harcourt. Tel: 234-802 408 1331. Abuja Office: Abia House, Plot 979, 1st Avenue, Off Ahmadu Bello Way, Cadastral Zone AO, Central Business District, Abuja. Tel: 09-8700465 Website: www.fsdhgroup.com Email: [email protected] Our Reports and Prices are also Available on Bloomberg {FSDH<GO>}

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make their own investment decisions without undue reliance on any information or opinions contained herein. The

opinions contained in the report should not be interpreted as an offer to sell, or a solicitation of any offer to buy any

investment. FSDH Merchant Bank Limited may invest substantially in securities of companies using information contained

herein and may also perform or seek to perform investment services for companies mentioned herein. Whilst every care

has been taken in preparing this document, no responsibility or liability is accepted by any member of FSDH Merchant

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equity research: cap plc · mix of equity and liabilities in the ratio of 39.84% and 60.16%...

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