Why Dangote’s NASCON Allied’s Profit May Drop Again.
With the rising input costs, increasing in distribution and administrative expenses, coupled with the re-appearance of finance expenses, NASCON Allied Industries Plc, a subsidiary of the Dangote Group may see the lowest profit record in three years when the 2019 earnings report reaches the market in weeks.
Profit may drop more than twice the 17 percent plunge the Salt and Food seasoning producing company recorded at the end of 2018.
The company in a statement a fortnight ago announced that its fourth-quarter unaudited report of December 31, 2019 showed its total assets rose to N34.94 billion from N30.27 billion in the corresponding period of the preceding year, while its revenue also rose to ₦27.58 billion compared to ₦25.65 billion from the previous year.
The statement, however was silent on the amount spent to get the N27.58 billion revenue.
Input cost grew well ahead of sales revenue and led to the profit drop in 2018. The development intensified in 2019, leading to an accelerated drop in the company’s profit at the end of the third quarter operations in September 2019.
Input cost per naira of sales revenue has continued to grow from 63 kobo in 2017 to 70 kobo in 2018 and further to 76 kobo at the end of the third quarter in 2019. The trend has eroded profit capacity with gross profit margin down from 37 percent in 2017 to 24 percent at the end of September last year.
A drop in gross profit in the third quarter was worsened by virtual dry up of other operating gains. An inflow of other operating gains to the tune of N842 in 2018 had helped the company to moderate the drop in gross profit in the year. At the end of the third quarter of last year, a drop of the operating gains to insignificance and increases in distribution and administrative expenses undermined operating profit.
A drop in operating profit was further reinforced by a reappearance of finance expenses in the year after a complete absence in the preceding year. While the company is expected to build sales revenue to a new high in 2019, the strength to convert the earnings into profit is expected to be lower than at any time in the preceding five years.
NASCON Allied Industries closed the third quarter operations in 2019 with a turnover of N21 billion – an increase of 12 percent year-on-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.
The company recorded the first drop in sales revenue in several years in 2018 but traded on the path of sales recovery and growth in 2019. It is expected to improve sales revenue to the region of N29 billion for the 2019 financial year, indicating an increase of 12.5 percent for the full year.
The gains in sales failed to get down to profit as cost of sales claimed more than all the increase in sales revenue during the period. Cost of sales grew more than twice as fast as turnover at 26 percent at the end of the third quarter, slashing gross profit margin from 33 percent in the same period in 2018 to 24 percent at the end of the third quarter of 2019. With increased proportion of sales revenue claimed by input cost, gross profit dropped by 17 percent to about N5 billion, indicating a major increase in input cost per unit of sales revenue.
Further strains came from both angles of other income and operating expenses. Two other income lines – other income dropped by 71 percent and other operating gains fell from N778 million to insignificance over the review period.
With increases in distribution and administrative expenses, operating profit dropped by 40 percent to N3 billion at the end of the third quarter. This is further to a drop of 22 percent in operating profit at the end of the preceding year.
Disappointing income and rising costs continued in respect of investment income and finance expenses, which undermined profit performance. Investment income fell by 81 percent to under N90 million while finance expenses reappeared to stand at N187 million from complete absence in the preceding year.
The company experienced operating pressure all the way from input cost to the bottom line, which undermined profit capacity considerably. While revenue improved sufficiently to ensure recovery from a drop in the prior year, the ability to convert revenue into profit weakened significantly at the end of the third quarter.
NASCON Allied closed the third quarter operations with an after tax profit of N2 billion, a drop of about 47 percent year-on-year. Rising costs and other income stood between an increase of 12 percent in sales revenue and a drop of 47 percent in after tax profit over the review period.
Net profit margin sank from over 20 percent in the same period in 2018 to 9.6 percent at the end September 2019. This is the lowest net profit margin for the company in six years. Further loss of profit margin can be expected as long as management is unable to keep sales revenue growing at equal pace with costs.
Full year profit is estimated at N2.7 billion for NASCON Allied Industries for the 2019 financial year – the lowest profit figure in three years. That will be an accelerated drop of 40 percent from the closing profit figure of N4.4 billion in 2018 – which was a drop of 17 percent for the year.
The company earned 76 per share at the end of the third quarter of 2019, down from N1.43 per share in the same period in 2018. The full year estimate is N1.02 per share for the 2019 operations. It earned N1.67 per share at the end of 2018 and gave out N1 per share in cash dividend to shareholders.
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