Business

Meyer Paints: Cost pressure hurts earnings

Weak macroeconomic environment and its multiplier effects on businesses is taking a toll on the profit margin of Meyer Paints Plc, writes CHRIS UGWU

 

Rising costs and, in many cases, scarcity of key raw materials, have continued to affect the operations of manufacturing companies with adverse effect on their profit margins.

 

The trend compounded by ravaging COVID-19 and reflective of the weak macro-economic environment, has had its multiplier effect on general liquidity within the system and investor appetite and also resulted in many companies experiencing declining purchasing power and competitive pressures.

 

The consumer is significantly stretched as inflationary pressures weigh heavily on purchasing power, a trend leading to a drag on volume of sales. The cheaper price of imported goods is also blamed for the penchant of Nigerians to patronise it to the detriment of locally produced goods.

 

This is why many local industries, including paints manufacturers that cannot stand the heat of the competition in the same market with imported goods are fast disappearing from the industrial landscape.

 

Also, domestic constraints such as depletion of fiscal buffers and dwindling foreign reserves, among others, have remained hydra headed monster to the business operating environment.

 

Market watchers also believe that for the paint industry to survive, more is needed to be done in order to totally curb the problem of counterfeiting. Individual companies must also be able to come up with technological innovations that will help counter the activities of counterfeiters.

 

Meyer Plc, like its peers, has continued to see fluctuation in profit in recent times.

 

The market sentiments for the shares of the company have also dropped, reflecting the general trend in value of shares quoted on the floor of the Nigerian stock market.

 

Due to volatility in the economy, investors had remained hopeful that the company’s innovative distribution strategies would boost revenue for the company. The company’s share price stood at 20 kobo at the close of trading last Friday.

 

Financials

 

The paint manufacturer finished the 2018 financial year ended December 31, with a profit after tax of N319.187 million as against a loss after tax of N267.844 million reported in 2017.

 

Profit before tax stood at N182.302 million from a loss of N264.8709 million a year earlier. Revenue for the period dropped by 11.56 per cent to N970.134 million from N1.097 billion in 2017. Cost of sales stood at N584.589

 

million in 2018 from N764.263 million posted in 2017. Investors hopes of profit sustainability was a mirage as the group began the 2019 financial year ended March 31, with a loss of N292,000 as against a loss of N61.288 million reported in 2018. Revenue grew by 33.99 per cent to N327.629 million from N244.501 million in 2018.

 

However the cost of sales equally grew by 22.36 per cent in 2019 to N212.157 million as against N173.378 million posted in 2018. Meyer Paints sustained loss position with a report of a loss after tax of N29.581 million for the six months ended June 2019 as against loss of N93.720 million recorded a year earlier.

 

Loss before tax stood at N27.314 million in 2019 from N93.920 reported in 2018. While revenue grew by 17.83 per cent to N604.454 million in 2019 from N512.990 million in 2018, cost of sales equally grew by 13.38 per cent from N345.086 million in 2018 as against N391.259 million in 2019.

 

The paint manufacturer posted a loss after tax of N34.065 million for the third quarter ended September 30, 2019 as against a profit of N186.107 reported in 2018. The group’s loss before tax stood at N30.846 million as against profit after tax of N186.107 million in 2018.

 

Revenue for the period grew by 14.06 per cent to N858.318 million from N752.461 million in 2018. Cost of sales stood at N562.514 million in 2019 from N491.983 million posted in 2018 representing 14.33 per cent growth.

 

Meyer Paint close the 2019 financial year ended December 31, 2019 with a loss after tax of N13.598 million from a profit of N319.187 million in 2019. Revenue grew by 14 per cent to N1.106 billion from N970.134 million posted in 2019.

 

Cost of sales dropped by 21.15 per cent from N584.589 million to N708.240 million in 2020. Meyer began 2020 financial year with a loss after tax of N24.991 million for the first quarter ended March 31, 2020 as against a loss of N292,000 reported in 2019. Loss before tax stood at N24 million from equally a loss of N292.000 in 2019.

 

Revenue dropped by 19.29 per cent from N327.629 million in 2019 to N264.405 million in 2020 while cost of sales grew by 21.46 per cent to N166.623 million from N212.156 million in 2019.

 

For the second quarter ended June 2020, the group reported a loss after tax of N60.732 million from a loss of N29.581 million in 2019. Loss before tax stood at N59.255 million  from loss of N27.314 million in 2019. Revenue declined by 34.82 per cent from N604.454 million to N393.964 million in 2020.

 

Cost of sales dropped by 35.37 per cent from N391.259 million to N252.860 million in 2020. Meyer recorded a loss after tax of N100.528 million for the nine months ended September 30, 2020 from a loss of N34.065 million in 2019. Loss before tax was N98.233 million from a loss N30.847 million in 2019.

 

Revenue dropped by 33.99 per cent to N566.511 million in 2020 from N858.318 million in 2019 while cost of sales grew by 35.92 per cent to N360.414 million in Q3’20 as against N562.514 million in 2019.

 

Following N1.781 billion profits realized from the disposal of the company’s building, the paint firm ended the 2020 financial year with a profit after tax of N1.118 billion from a loss after tax of N13.598 billion in 2019. The group’s profit before tax stood at N1.638 billion from a loss before tax of N7.176 billion in 2019.

 

However, revenue for year 2020 decreased from N1.1 billion in 2019 to N828 million. This represents a decrease of N 278 million or 25 per cent when compared to prior year.

 

The decrease in revenue was majorly attributed to the negative impact of COVID-19, which led to unfavorable economic condition and reduction in sales. Cost of sales decreased by 34 per cent or N239 million in absolute terms from N708 million in 2019 to N469 million in 2020 representing 64 per cent and 57 per cent of turnover for 2019 and 2020 respectively.

 

The decrease in cost of sales can be attributed to the downward movement in turnover during the year 2020. Other operating income increased by N1.80 billion or 7544 per cent from N24 million in 2019 to N1.83 billion in 2020.

 

The increase was majorly as a result of the gain on the disposal of the company’s head office during the year under review.

Meyer sustained the positive tempo to begin the year 2021 with a profit after tax of N5.667 million for the first quarter ended March 2021 as against a loss of N24.988 million reported in 2020. Profit after tax stood at N8.110 million as against N23.998 million in 2020. Revenue, however, declined by 15.48 per cent to N223.473 million from N264.406 million in 2020.

 

Cost of sales stood at N145.155 million in 2021 from N166.623 million in 2020.

 

However, hopes that the positive earnings will be sustained was a  mirage as Meyer reported a loss after tax of N9.3326 million for the half year ended June 30, 2021 as against a loss after tax of N60.731 million in 2020.

 

However, revenue for the period grew by 23.22 per cent to N485.461 million from n393.965 million in 2020. Cost of sales stood at N331.462 million in 2021 from N252.860 million recorded the previous year.

 

Challenges of operating environment

 

Kayode Falowo, Chairman, Meyer Paint Plc, while addressing shareholders at the 49th Annual General Meeting in Lagos, recently, said the year 2020 was indeed very challenging as COVID-19 brought the global economy to its knees.

 

“This had significant impact on businesses as global supply chains were disrupted, manufacturing activities halted, service sectors slowed down considerably and the financial markets took a downturn following investors search for safehaven asset classes.

 

 

“Oil prices plummeted to an alltime low, airlines were grounded, hotels shut down and economic activities in all nations were at zero level. This triggered a global recession across both advanced and emerging economies as GDP growth numbers hit negative territories, prompting broad-based monetary and fiscal responses by governments.

 

“The Nigerian economy witnessed one of its deepest recessions since the early 1990s. According to the National Bureau of Statistics (NBS), Gross Domestic Product (GDP) grew by 1.87 per cent in Q1’20 but contracted by 6.10 per cent and 3.62 per cent in Q2 and Q3’20, respectively, before returning to the growth path in Q4’20 at 0.11 per cent beating our expectation of a 1.86 per cent contraction.

 

“The modest growth was mainly attributed to the appreciable contribution from the non-oil sector, following the gradual ease in lockdown restrictions. Overall, in 2020, the annual growth of real GDP was estimated at –1.92 per cent, a decline of 4.20 percentage points compared to the 2.27 per cent recorded in 2019.

 

“The Federal Government’s response to the economic situation was through social safety policies targeted at vulnerable persons. These included provision of temporary reliefs to various sectors in the form of specific intervention funding, interest rate cuts, increased moratoriums, tax rebates and external financing to help curb near term pressures,” he said.

 

Looking ahead

 

Falowo expects that 2021 will experience strong global economic recovery, mainly due to earlier than expected discovery and rollout of vaccines, strong fiscal & monetary stimuli and expansion of manufacturing activities as lockdown eases.

 

“We expect the Nigerian economy to continue in a positive trajectory driven by increase in crude oil production and prices and increase in the contribution of the non-oil sector to the country’s GDP,” he said.

 

Last line

 

The company should proactively continue to work towards cost reduction and optimisation in all areas of its operations to ensure the survival of the business.

 

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