7up loses the fizz, posts N10bn loss

OKEY ONYENWEAKU |

Investors of 7up Nigeria are becoming increasingly uncomfortable with the performance of the company. With revenues sliding, profit dipping and liquidity tanking, there appears to be no remedy insight for a company which over the years has been a premium equity brand in terms of profitability, dividend pay out and stock price.
The company which previously had consistently  packed the pockets of shareholders with  cash has suddenly become a leak.
7UP  posted a massive loss before tax of N10billion for the financial year ended March 2017.
A review of company financials show that revenue increased from N85.6 billion in 2016 to N108.2 billion in 2017.
While cost of sale went up from N60.6 billion in 2016 to N90.5 billion in 2017, Gross profit fell from N25 billion in 2016 to N12.9 billion in 2017.
Selling and distribution increased from N11.8 billion in 2016 to N13.9 billion in 2017
The company recorded a loss after tax of N10.7 billion in 2017 compared to a profit after tax of N3.34 billion in 2016.  Not surprisingly, 7UP Nigeria Plc failed to pay dividend this year for the first time in five years.
The company which is battling for survival had posted a mind-boggling N4.8b loss for the third quarter of the year 2016. The result, showed a total collapse of earnings from its 2015 third quarter profit after tax of N2.2b. The 2017 year end result of the company signposts one of the worst operating performances for the carbonated soft drink manufacturer in the last twenty years. This has left investors confused, angry and anxious.   The company’s stock has already plunged by 36 per cent from N129 per share on January 3, 2017 to N82 per share on July 7, 2017.
The company has been affected by a battery of circumstances that has left the its books in tatters. A major problem has been the impact of foreign exchange on the firms cost of goods sold. The cost of critical imports such as the condensates for its various soft drink brands left the company with thin gross margins which were made worse by higher costs of domestic financing as interest rates escalated in the year.
The company’s management soberly blamed recent operating performance to weak macroeconomic factors ranging from the continued weakness of the naira against other currencies to higher costs of distribution, sales, general and administrative expenses. While the company’s revenue grew by 26% to N108.2bn at year end results March, cost of sales rose 49% in the same period to N90.5bn.
7 Up once the toast of investors as recently as 2015 seems to have fast lost its lustre, BH research reveals the company’s share price saw massive bullishness in the last two years as investors had a deep love affair with the drink maker. The cuddly affection has since gone sour, as a growing number of analysts begin to ask the company for more detailed explanation of its disastrous third quarter loss.
Some observers sympathise with the company as they attribute its predicament to ill-advised government policies that have crippled manufacturers and allowed little wriggle room for them to manoeuvre out of a high cost manufacturing situation.  The weakness of the domestic currency in the foreign exchange market and foreign exchange access restrictions placed on 41 categories of imports conspired to make a bad situation worse as the company had to seek foreign exchange from the parallel market where foreign currencies were sold at premiums above 60 per cent of official market rates. A significant number of 7up’s executive staff were paid in foreign currency, thus bloating fixed costs and raising the company’s breakeven margin at a time the local currency, the Naira, exchanged for N352 to the United States dollar (current rate is slightly over N500 to the dollar). The naira exchanged for the dollar at N168 at the official market last year before the CBN devalued it to N197/ $1.
A Lagos based stockbroker Mike Ezeh, was of the view that 7ups shares are primed for a major plunge. ”Seven Up could see a massive shorting of its stock in weeks ahead as trader’s stampede for the doorway, the last one out could end up carrying an empty can!”, he said.
Similarly, David Adonri, Managing Director, High Cap Securities Limited explains that the macro- economic environment was dragging manufacturers into a mess. ”Many companies are running into operating chaos with no speed breaks, the possibility of a critical accident is as close to certainty as you can get”, he said.
Seven-Up Bottling Company Plc, audited results for 2016 reveals that net income for the fiscal-year ending March 31 2016 fell 53% to N3.34bn, from N7.12bn a year earlier.
The poor performance of the soft the company was blamed on the worsening economic environment in the country – low oil revenue, currency headwinds, inflation of 15.6% as of May 2016 compared to 9.2% a year earlier, which is the last time the company posted higher profits. Insurgency and terrorism in different parts of the country, competitive pressure, among others also weighed on the company’s profits.
The bottler of Pepsi, Mirinda, Aquafina, among others saw a 4% lift in sales for the year to N85.6bn, from N82.5bn in fiscal 2015. Cost of sales rose 17% to N60.6bn, from N52bn a year earlier, resulting in 18% drop in gross profit to N25bn, from N30.4bn in 2015.
Seven-Up profits has been negatively impacted by a host of macro-economic headwinds, including currency devaluation which is reflected in a higher cost of sales and skyrocketing net finance cost (32%) to N3.2bn, from N2.4bn.
Pre-tax profit for the beleaguered company fell 57% to N3.8bn, from N8.7bn a year earlier. Before now, the company displayed a progressive trend in the growth pattern of its earnings after tax (PAT).
It posted a PAT of N1.529 billion in 2009, N1.758 billion in 2010, N2.277 billion in 2011, but dropped off to N1.678 billion in 2012. However, it rose to N2.856 billion in 2013 and advanced to N6,434 billion and further to N7,125billion in 2015, an unprecedented stretch of sustained earnings increase. But it plunged into the red by N10bn in 2016.
Industry Perspective: The Company faces serious challenges from competitors such as Nigerian Bottling Company, makers of Coco-cola, Fanta, Sprite and Fayros drinks of Nigerian Breweries. Seven-Up controlled about 22% of the market share from a survey carried out in Lagos. Another setback is as the result of health awareness on sugar consumption especially for the aged population: Pepsi, 7UP, Mirinda, Teem and Mountain Dew, which it produces and markets in all its present 9 manufacturing plants.
The conditions appear to have changed for Seven-UP in just a few months that the Government implemented stringent policies.
This is indeed a tough period for businesses given the general economic contraction. This, many think, would also affect the purchasing power of consumers of not only products of Seven-UP given the persistent liquidity squeeze in the system. Of course, profit margin as well as turnover targets may be reduced. It is also expected that when other growth indicators are slow, dividend projections will slump and possibly drag down its share price. But the persisting exchange rate which has seen the naira appreciate may give the company that imports most of its raw materials some advantage. Seven-UP Bottling Company, though careful and cautious with information, may need to work harder to continue sell its frizzy drinks and survive.