M&B 2019H1: Profit Up On Lower Finance Cost, Higher Interest Income, Property Disposal

Rating: Hold
Current Market Price: N2.10
Latest Dividend: N0.20
Year High: N2.85
Year Low: N1.91
Fair Value: N2.32
Equity Analyst: Tunde Segun Jeariogbe

Key Investment Ratios
• This report observed the half-year financial performance of the company for the period ended 30th June 2019, compared the same with numbers released in a similar period of 2018 to establish growth.
• Meanwhile, the full-year financials for the year ended 31st December 2018 was very instrumental to the valuation and projection of future returns expected.
• We observed that revenue for the three-month period stood below the comparable period in 2018. Nevertheless, the profit reported for the period was helped by a lower Finance Cost, Earnings from the disposal of properties and a higher Interest Income.
• Long-term borrowings reduced significantly to N17.50 million, compared to the N679.01 million reported in its 2018 half-year financials.
• On the other hand, Trade and other payables stood up the current liabilities during the period although the short-term borrowings is also high, compared to the previous half-year.

Company Figures
• As noted above, Turnover stood at 12.01% below the comparable period of 2018. Please note that the turnover is currently valued at N4.05 billion as against N4.60 billion in 2018 half year.
• Cost of Sales followed the same trend, dropping by 11.61% to N2.73 billion from the previously stated N3.09 billion in the comparable half-year.
• Operating Profit is currently estimated at N504.74 million from the N596.85 million in 2018 half-year business report.
• Operating Expenses dipped by a marginal 6.86% to N875.74 million against N940.25 in similar quarter.
• Finance Cost used through the period dipped to N109.92 million from N209.34 million stated at the end of 2018 half-year business session.
• Meanwhile, based on the boost received from the items mentioned in our introduction, Profit Before Tax stood at marginal points above the comparable year at the currently stated N427.68 million.
• Thus, Profit for the period stood at N290.82 million, this is 9.97% above the N264.45 million achieved at the end of the first six months of 2018.

• Current Assets of May & Baker is now valued at N5.75 billion this is 66.14% above the N3.46 billion valuation in the 2018 half-year.
• In the same trend, the Non-Current Assets rose by 30.16% to N4.78 billion, as against N3.67 billion last year.
• Current Liabilities is valued at N4.21 billion, higher than the N2.07 billion stated in its 2018 six months performance report.
• On the other hand, Non-Current Liabilities is 30.05% below 2018 half-year value.
• Due to the large differences between the Total Assets and Total Liabilities at the end of the period, Net Assets improved by 45.12% to N5.37 billion, as against N3.70 billion the last half-year.
• Retained Earnings dipped marginally by 6.97% to stand at N1.50 billion against N1.61 billion.

Financial Strength/Solvency Ratios
• Debt Ratio is currently estimated at 0.49x, same as 1.81% above the 0.48x estimated in the corresponding period of 2018. This implies that Total Liabilities is same as 49% of Total Assets.
• Total Debt to Equity was equally estimated at 0.96x as against 0.48x estimated in the comparable quarter. This implies that more debt was used in service the company’s assets through the period.
• It was established that Equity is the same as 51% of May & Baker’s Assets Value, estimate from 2018 half-year performance indices yielded 52%.
• Nevertheless, we can conclude that May & Baker’s shares in fairly liquid although the estimated Beta stood slightly below the market beta, and below its industrial peers.

Profitability Ratios
• EBITDA margin estimated for the period stood at 12.45%, slightly below the 12.95% estimated from 2018 half-year earnings numbers.
• Pre-Tax Margin, on the other hand, revealed improved profitability as it stands at 10.55% same as 24.98% above the 8.44% margin estimated from 2018 half-year numbers.
• Effective Tax Rate was stable through the period as shown in the table below.
• Cost of Sales is 67.41% of the Turnover figure; this is only 0.45% above the 57.11% estimated in 2018. This is a confirmation of the management effort to control its direct cost.
• Return on Equity is currently estimated at 5.41% lower than the7.14% in 2018.

Efficiency Ratios
• Operating Expenses to Turnover value is currently measured at 21.59%, this is 5.85% improvement in efficiency during the quarter.
• Turnover to Total Assets Ratios stood at 38.45% against 64.50%, same is 40.39% drop in management efficiency when compared to estimate from 2018 half-year performance indices.
• Working Capital Ratio, a ratio that indicates a company’s effectiveness in using its working capital, was estimated at 2.63x a 20.60% drop from the 3.31x estimated in 2018.
• Further testing the management’s efficiency, we tested the Working Capital Ratio, which confirmed that Current Asset is higher than the current liabilities at the end of the period.

Investment/Valuation Ratios
• When put side-by-side the comparable quarter earnings, the management of May & Baker managed to build the amount earned per share to N0.17 from the N0.15 in similar period of 2018.
• Our half-year Adjusted P/E-ratio stood at 12.46x, slightly below the 15.00x in 2018.
• The said Earnings Per Share is a yield of 8.03% of the price of May & Baker on the floor of the exchange on the day the result was released. This is a better yield, when compared to the 6.66% in comparable period of last year.
• The value of May & Baker shares in its book is currently estimated at N3.12, which is a 45.12% improvement over the previous value. Please note that the rate was boosted by the improvement in the Net Assets as explained earlier.
• Thus, Price to Book Value showed an undervalued state on the floor of the exchange.
• See the below table for details.

Having considered the financial stand of May & Baker, and while maintaining our conservative valuation approach, we projected with the assumption that the management will work on reduced interest yielding liabilities and marginally build dividend over the years. We have therefore valued each unit of May & Baker at N2.32 and have rated it a Hold.