NASCON Allied Industries Plc slipped on the course of profit recovery for the second year with a profit decline at half year ended June 2021. There is a stable growth in sales revenue so far this year but costs are increasing ahead of the earnings, which is impinging on margins. The strength to keep profit up this year was yet to be found at half-year closing.
The food seasoning producing company stemmed the tide of two years of profit drops last year and jerked up after tax profit by 46 per cent to N2.7 billion at full year. The big event that made that happen was a 24 per cent cut in input expenses, which isn’t happening in the current financial year.
Input cost is racing up this year instead and that intensified in the second quarter, beating sales revenue at a ratio of three to two. That prevented the gains in sales from reaching gross profit in the second quarter.
With increases in distribution and administrative expenses, the company suffered a drop of 24 per cent in operating profit quarter-on-quarter at the end of June 2021.
The company posted a drop of 15.5 per cent in after-tax profit quarter-on-quarter to N727 million for the second quarter. The drop more than countered an increase of 15 percent in profit in the first quarter, leaving a year-on-year profit decline for the company at half year.
The year-to-date position shows a turnover of N17.6 billion for NASCON Allied Industries at the end of half-year operations in June 2021. This is an increase of 21 per cent year-on-year, a strong acceleration from a marginal improvement of less than 2 per cent at the end of 2020.
Growing sales is the major positive signal for the company so far this year. The company sells edible, refined and bulk industrial salt as well as seasoning and vegetable oil. It also renders freight services to clients for the delivery of products.
Inability to convert the improving revenue into profit is however the challenge for NASCON Allied this year. The main culprit is the cost of sales, which consumed virtually all the gains in sales revenue in the second quarter.
At N10.6 billion at half-year, input cost grew slightly ahead of sales revenue at 22 per cent against 21 per cent year-on-year. Gross profit amounted to about N7 billion for the six months of trading, representing an increase of 19 per cent over the review period.
Other cost increases as well as revenue disappointments however claimed more than all the increase in gross profit, leading to a decline in operating profit at the end of half-year.
Earnings disappointment came from other operating gains, which dropped from N394 million to a loss of N165 million over the review period. This is a reversed movement from last year’s record when a big windfall from operating gains boosted operating profit.
Distribution cost grew by close to 20 per cent to N3.3 billion over the period and administrative expenses rose by 30 per cent to N1.4 billion. The cost increases encroached on earnings and caused a drop of 12 per cent in operating profit to N2.1 billion at the end of June 2021.
Some respite came from a drop of close to 80 per cent in finance expenses to N25 million and an improvement in investment income. The sharp reduction in net finance cost lowered the margin on the drop in pre-tax profit to 6 per cent to close at N2.1 billion for the half-year operations.
A drop of 13.6 per cent in tax expenses beefed up the bottom line a little further. The decline in after-tax profit narrowed down further to 2.5 per cent to close at N1.4 billion for the first six months of trading.
The full-year earnings outlook for the company indicates that the increasing cost profile seen in the second quarter is expected to persist with a further squeeze on margins. The second half is therefore not likely to deliver as much profit as realised in the first half of the year.
The company appears to lack the operating strength to sustain recovery functions for the second year. Its after-tax profit had dropped from N5.3 billion in 2017 to N4.4 billion in 2018 and further to N1.8 billion in 2019 but reversed to N2.7 billion in 2020.
Based on the current cost and income balance, a profit decline looks likely for NASCON Allied at full year. The profit margin is down from 10.2 per cent in the same period last year to 8.3 per cent at the end of June 2021.
The company’s managing director, Paul Farrer, is however optimistic of maximizing gains from capacity expansion and aggressive engagement across its markets.
The company earned 55 kobo per share at the end of half-year operations, a slight decline from 56 kobo per share in the same period in 2020. It earned N1.02 per share for the 2020 full year and paid a cash dividend of 40 to shareholders.
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