Crown Paints Ltd (NSE: BERG) announced their audited financial results for the Full Year (FY) ended 31st December 2014 on 30thApril 2015.
Recommendation: Pre-Bonus BUY Target Price KES 136.28 (18.5% upside – 24th June 2015), Post-Bonus fair value KES 51.91 (54.9% Downside)
Sturdy Topline; Turnover Grows by 17.06% to KES 6.04 Billion, driven by expansion into new markets
Growth in revenue scaled up by 17.06% FY14 as compared to 16.38% growth FY13. This is largely attributable to increased sales from their subsidiaries in Tanzania, Uganda and their recently opened Kigali plant. There has been increased demand for their products stemming from the construction boom being experienced in the region with high- end premium brands making up 75% of crown paint sales in Kenya while economy brands account for 70% of the regional turnover. The paints manufacturer had mentioned intentions of opening up a subsidiary in Ethiopia once they got approval from the government.
Pre-tax Profits Edged Down 54.57% to KES 151.48 Million; After-tax Profits on a Similar Trend Down; 90.78% to KES 19.72 Million
The huge drop in profits was underpinned by the challenging market dynamics emanating from their subsidiaries in their expansion programme within the region. Heavy investments were made in the second half of 2014 in aggressive marketing with an aim of securing a large market share in their countries of operation. The management disclosed they had spent KES 94.5 Million in Tanzania and Uganda on advertising, putting up billboards, running campaigns and adverts which drove up the operating expenses. Interest paid also rose from KES 30.10Million to KES 87.89 Million hence adding more pressure on the bottom line. PBT margin stood at 2.51% (FY13 – 6.46%) while the PAT margin chalked at 0.33% (FY13 – 4.15%). The decline in net income further suppressed both return on assets (ROA) and return on shareholders’ equity (ROE) from 7.26% (FY13) to 0.51% (FY14) and 15.70%(FY13) to 1.46%(FY14) respectively.
EPS Declines by 90.79% to KES 0.83; DPS at Parity with Previous Payout.
Crown Paints faced a turbulent financial year 2014 leading to a 90.79% drop in total earnings attributable to the shareholders. The company reported an EPS of KES 0.83 from KES 9.01 (FY13). The management however recommended the payment of a final dividend of KES 1.75 similar to what was paid in the preceding year. This connotes that the company will be paying out dividends from their retained earnings hence deciphering into a dividend payout of 211%. (Dividend yield- 1.72%). The group’s liquidity worsened with the cash flows from operations marking at KES -9.82Million from 110.77Million.
Outlook: The ongoing local and regional expansion has contributed grossly to the poor performance due to high operating expenses. Crown Paints remains entrenched in scaling up its market share in the region while tapping from the construction boom springing forth in East African region. The company holds a gleam outlook in the near future upon completion of the expansion projects with a higher revenue generation capacity anticipated from the firm while also remaining agile to meet its subsidiaries costs from their respective revenues. The directors also recommended an attractive bonus issue of 2 shares for every 1 held which may support the short term by spurring demand. Book closure is slated for 24th June 2015.