Company Analysis

7-Up Earnings Decline Amidst Rising Cost, Weak Purchasing Power

7-up-graph7-Up Bottling Company Plc last week released its audited result for the full-year ended March 31, 2016 to the capital market community, in line with corporate governance requirement, same date as that of 2015.
The company increased sales revenue by a marginal 4% for the period under review to reflect the weak purchasing power and the prevailing high cost of living. Turnover limped from N82.45 billion in the corresponding period of 2015 to N85.63 billion, while profit for the same period took a 53% plunge from N7.13 billion to N3.35 billion. This was attributed to high cost of sales, financing and other production inputs as revealed by the numbers posted.
Shareholders’ funds however rose to N24.78 billion from N23.93 billion in 2015.
The estimated profitability ratios for the period under view were in negative territories, with Return on Capital Employed declining to 13.51%, as against the 29.77% estimated in the comparable period’s financials. As a reflection of the tilmes, full year Earning Per Share (EPS) fell to N5.23, as against N11.12 in 2015, representing also a 53% drop. The market is however yet to respond to the unimpressive performance noticed in the estimated ratios and the resultant poor payout of N1.60 dividend per share (DPS), as against the previous year’s N2.75, resulting in a low dividend yield of 1.14%.
The company’s numbers were in line with our prediction in the half year update.
Meanwhile, on the strength of the company’s 2016 full-year result, the expected 3-months and full year earnings for 2017 are projected to be N1.80 and N5.58 respectively. Please note that the average dividend payout ratio and yield in five years stands at 33 percent and 2.55 respectively.

7-UP BOTTLING
FULL YEAR ENDED MARCH 31,, 2016
COY 2015 2016 % Chg
(N) (N)
Date Released Monday , June 29, 2015 Wednesday, June 29, 2016
price @ Released 179.10 140.00
Turnover 82,450,505,000 85,634,679,000 4.00
Profit After Tax 7,125,788,000 3,347,463,000 -53.00
Shareholders’ Fund 23,933,633,,000 24,779,594,000 3.50
Market Cap as @RDate 114,729,733,834 89,682,650,000 -22.00
ESTIMATED RATIOS
Earnings Per Share 11.12 5.23 -53.00
PE Ratio 16.10 26.79 66.40
Earnings Yield 6.21 3.73 -39.94
Book Value 37.36 38.68 3.53
Price to Book 4.76 3.62
ROE 29.77 13.51 -54.62
DPS 2.75 1.60 -41.82
Profit Margin 8.64 3.91 -54.75
Year End March March

2016 Financial Performance
The company’s unimpressive performance as shown in all profitability ratios and dividend payout has lowered this equity’s fundamental for the year until stronger numbers start hitting the market again, irrespective of the company’s conservative nature in terms of payout over the years. Seven-Up’s numbers were undulating for 2016 as reflected in its top and bottom lines.
It started the year with first quarter EPS of N3.03 and dropped to N2.84 by the second quarter. While third quarter figure moved to 3.50 and full year- N5.23, all of which were below those of the corresponding periods of 2015.
This unstable performance showed on the price action over the period as it opened the year at N156 and rallied as high as N197 before closing at N155 on March, 31 2016, it’s year-end. The price has dropped lower to reflect weak earnings which cannot support its price, only that the shareholding structure of the company and relatively small share outstanding has helped it to reduce market volatility, keeping the price at current level. On the strength of the company’s earnings power the stock is currently valued at N108 per share.

Technical View

Price action revealed that 7-Up have been rallying for four years before the recent down trend, a situation that is attributable to profit taking from the long trend and weak earnings that were posted on quarterly basis and for the full-year 2016. Any break down of the yellow line will move to support level of N108. Meaning traders should wait and watch.

Findings/Recommendations
The price decline of 7-Up Bottling company started after the management posted its second quarter earnings that were below market expectation, but this was reversed, after which it continued its downward trend until the march 31, 2016 result were released last week. This recent numbers have not supported the high valuation placed on the stock by investors at the commencement of the positive year end performance that boosted traders account by N2.75, plus capital appreciation by the said investors’ revaluation. In other words, the stock’s earnings power and position did not supports future rally, despite the defensive nature of the stock. Also the current trading price is too high at full-year EPS of N5.23.
Traders should note that the stock may not yield enough momentum necessary for short trading until the market starts receiving stronger positive numbers in the new financial year. Nevertheless, for long positions, the stock looks good for portfolio booster and capital protection due to shareholding structure of the company

7 UP Bottling Co PLC
Share Holding Structure
Affelica S.A 72.70%
Nigerian and others 27.30 %
Other Statistics
Shares Outstanding (MN) 640,590,363
Opening Price (2016) N156
Closing Price (2016) N155
Closing Price (As at Last week) N142
Market Capitalization N90,995,861,064
Date Listed 1986
Year End 31st March

Five-Year Performance
As the market continues to revalue the company’s shares on the strength of numbers posted so far in the last five years as it beat market expectations on quarterly and yearly basis but slowdown to end 2016 with unimpressive result. Profitability level for the period grew by 99.44 per cent, while the price appreciated by 249 per cent for the period under consideration. The beverage and non-alcoholic soft drink company within the period under review has recorded a significant growth in its top and bottom lines. Sales revenue grew from N59.86 billion in 2012 to N85.63 billion in the full year of 2016, just as profitability level had a significant growth within the same period, after hitting all high N7.13 billion in 2015 to close N3.35 billion, earnings recorded through the five years was in an undulating trend strong and impressive that supported its share price till the recent fallout that lead to the lowest dividend in five years. Shareholders’ equity now stands at N24.78 billion from the previous N10.31 billion in 2012, representing 140 per cent growth and investment in capacity building to sustain sales and earnings.
One of the strong supporting factors of the equity is the constant positive earnings, investor reward in terms of dividend and strong earnings power that has supported price.
Looking at the table below, investors have conveniently taken N11.05 per share as dividend in five years. Please note that the company’s share capital has remained constant for this period and also relatively small that had supported the numbers and share price so far. This company, even with its increasing capacity, but harsh business environment and falling disposable income of Nigerians have affected bottom line negatively. Despite the rebranding and repackaging of its products, demand for its products have slowdown as reflected in the turnover regardless of its relative low price strategy of the company. The increasing number of cottage companies in the industry has stiff competition.
7-UP BOTTLING
FIVE YEARS FINANCIAL PERFORMANCE
YEAR 2012 2013 2014 2015 2016
Ticker (N) (N) (N)
(N)
(N)
Date Released
July 02,2012
August 01,2013 June 30,2014
June 29,2015
June 29,2016
Price At Released 40.12 72.00 93.00
179.10
140.00
Turnover 59,864,385,000 64,088,879,000
77,888,548,000
82,450,505,000
85,634,679,000
PAT 1,678,471,000 2,865,504,000
6,434,601,000

7,125,788,000

3,347,463,000
Net Assets 10,307,595,000 12,577,980,000 17,328,695,000 23,933,633,000 24,779,594,000
DIVIDEND 2.00 2.20 2.50 2.75 1.60
BONUS nil nil nil nil nil

Ratio Analysis
The company’s earnings power and growth reflected on its earnings per share that grew from N2.62 in 2012 to as high as N11.12 in 2015, before dropping to N5.23 in 2016 seems worrisome as investors’ sentiment fell with the weak numbers elongating investors’ waiting period for recouping their investment. Also, share Price to Earnings Ratio (PER) moved from 15.31x in 2012 to the current 26.79x of the period of entry. Please note that the 2016 full-year earnings per share yielded 3.73% of the price at release date. Returns on capital employed through the period were on the average of 24%, while the margin of profit to sales revenue stood low between 2.80% and 8.64% to reflect the huge cost of operations. This requires immediate action from management to create value for its shareholders as the profit margin is below expectation by all standard. Unfortunately, the book value of the company is far below its market value, an indication of the premium placed on the stock by the investing public, suggesting that management should also grow its assets to build safety of margin for investors.
7-UP BOTTLING
ESTIMATED RATIOS
EPS(N) 2.62 4.47 10.04 11.12 5.23
PE Ratio 15.31 16.10 9.26 16.01 26.79
Earnings Yield 6.53 6.21 10.80 6.25 3.73
Book Value 16.09 19.63 27.05 37.36 38.68
Return on Equity (%) 16 23 37 29.77 13.51
Dividend Yield (%) 4.99 3.06 2.69 1.54 1.14
Profit Margin 2.80 4.47 8.28 8.64 3.91

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