N4bn 7UP loss exposes rot in real sector

Okey Onyenweaku
Seven up Plc, in a result that has kept investors shuddering, recently posted a mind-boggling N4.8b loss for the third quarter of the year 2016. The result, a total collapse from its 2015 third quarter profit after tax of N2.2b, 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 has been affected by a battery of circumstances that has left the company’s 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 N76bn in the nine-months to December, cost of sales rose 52% in the same period to N64bn.
The continued weakness of the naira caused finance cost to surge forward by 24% in the nine-months and ramped to 44% in the third quarter alone to N1.3bn, from N900m a year earlier.
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.
7ups audited 2015-year end results for the period ended March 31, 2015 was clearly impressive as profit after tax (PAT) climbed 10.7 per cent to N7.125 billion from N6.434 billion in the comparable period of 2014.
While Profit before tax (PBT) equally grew by 14.9 per cent to N8.749 billion from N7.616 billion in the corresponding period of 2014, revenue scaled to N82.450 billion from N77.888 billion in the Q1 of 2014; indicating an increase of 5.9 per cent. The company achieved this performance despite the biting economic environment which had adverse implications for firms in the consumer products market.
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.

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 appreciated 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.
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7up Plc Dividend and Bonus Information in 10 Years.
YEAR DIVIDEND BONUS
2003 0.75 k –
2004 0.75 k –
2005 1.00 k –
2006 – –
2007 1.25 k 1 for 4
2008 1.30 k –
2009 – –
2010 1.50 k –
2011 2.00 k 1 for 4
2012 2.00 k –
2013 2.20 k –
2014 2.75k
2015 1.60k