OPPORTUNITIES IN THE PAINT SECTOR

September 2013

Chapel
HillPrivate
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Limited
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andPartners
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A Chapel Hill Denham Company

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Chapel Hill Advisory Partners Limited (Chapel Hill) is the investment banking
business of the Chapel Hill Denham Group.

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Industry Background
Key customer considerations

General Industry challenges

Poor infrastructure weighs on manufacturing and
distribution costs

Colour consistency

Product quality

Only 10% of raw materials are sourced locally

Delivery delays

Liberal import policies, results in intensive industry

competition

Brand perception

High interest rates limit profitability for many of the

players

Product range

Distribution Network

Market share by revenue, listed companies only (2012)

2.08%

Nigerian paint manufacturers 2012 Financials (Nmn)

0.19%

DN Meyer Premier

African
Paints

CAP

Portland

Berger

5,231
1,661
1,116

2,866
(199)
(228)

2,514
284
192

1,487
(29)
(27)

258
(43)
(30)

23
27
26

2,876
1,757
1,119

2,386
1,609
777

2,907
1,132
1,774

2,581
1,931
650

292
280
12

403
287
105

47%
32%
176%
82%
38%

41%
-7%
123%
-25%
-10%

39%
11%
90%
11%
7%

38%
-2%
56%
-4%
-1%

27%
-17%
91%
-512%
-11%

113%
117%
6%
7%
25%

P&L

CAP

Revenues
PBT
PAT

Portland

Balance Sheet

Berger

Total Assets
Total Liabilities
Net Assets

12.01%

42.26%
20.31%

DN Meyer
Premier

African Paints
23.15%

Ratios
Gross margin
PBT Margin
Asset Turnover
ROE
ROA

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Overview of DM Meyer Plc

2012

2011

2010

2009

2008

(Nbn)

Share price performance LTM (rebased to 100)

500

BALANCE SHEET
Total Assets

2.6

2.7

2.9

24.9

20.8

Total Liabilities

1.9

2.0

2.2

12.1

9.4

Net Assets

0.7

0.7

0.7

12.8

11.4

375

250

PREMIUM AND PROFIT

125

Revenue

1.5

1.4

1.2

1.9

2.3

Profit/(Loss) before taxation

-0.029 -0.080 -0.232 -0.473 -0.298

Profit after taxation

-0.027 -0.054 -0.236 -0.637 -0.296

Sep-12

Dec-12
DN Meyer

Company shareholding structure

Mar-13
Other local paint manufacturers

Market Information
Share Price (N) as at 10 September, 2013

40.9%

49.8%

Jun-13

Sep-13
NSE ASI

Value
1.78

12 months High (N)

3.54

12 month Low (N)

0.74

12 month Average (N)

1.83

Shares Outstanding (Million)

325.00

Market Capitalization (Nmillion)

578.50

9.3%
Citiprops Ltd

Osa Osunde

Nigerian citizens

Sources: Company Accounts, CHD Analysis

Chapel Hill Advisory Partners Limited

A Chapel Hill Denham Company

DN Meyer Plc Company Background

About the company
DN Meyer manufactures and markets decorative paints in three different quality levels - standard, premium
and super premium quality.
It also specializes in auto refinish coatings, marine coatings, carpet tiles adhesives and carpet tiles. DN Meyers

subsidiary, "DNM Construction limited, engages in construction and renovation projects.

Paint production capacity is estimated at 8.4mn litres p.a. In 2011, paint products contributed 98% to revenues.
DN Meyer has a domestic operating track record spanning over 60 years, with has a strong and well recognized
brand name.
The company is open to consolidation options for growth.
Common Dealer Complaints

Slow response time to delivery;

Slow payment of rebates;
Limited colour options relative

to peers; and
Poor credit offerings by the
company.

Risks

Investment Case

Intense competition, a threat to

Robust

volume growth;

high

input

growth

consequent

Limited pricing power; and

Sustained

Strong industry positioning;

cost

structure and interest burden.

potential,

upon

successful

restructuring; and
Good

mix

of

standard

to

premium margin products.

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DN Meyer Key Performance Metrics

Customer satisfaction Recent focus on building customer-centricity, such as through the
establishment of nationwide depots to improve accessibility and reduce delivery timelines
historically key distributor complaints.
Employee retention With the exception of the recent takeover of the company by creditors which
led to alterations in the companys directorship, staff turnover over the years appears to be
unremarkable.
Revenue growth Turnover has been sustained on the path to recovery on reasonable volume
growth, over the past two years, following a consistent declining trend in the prior five-year period.

Profitability Historically challenged by high input and operating cost structures, amidst intensifying
competition that prevented a substantial price hike, recent measures to moderate costs appear to be
paying off.
Technology Limited funding for fixed assets in recent years implies possibly obsolete physical
structures. Most of the infamous debt was directed towards funding working capital requirements.

Brand recognition and company image Strong brand name and mind share. Products considered
very affordable for a mid tier paint manufacturer the largest growth segment of the 3-tiear market.
Several ownership and name changes, has had limited effect on its stability perception. Although
challenged, opportunity for a turnaround is still well recognized.
Market share 10% market share of listed companies by revenue. By our estimates, listed companies
control at least 90% of market revenues. DN Meyer has commenced several market penetration
strategies including rebates offered to dealers and nationwide regional depot construction.
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DN Meyer Financials Income Statement

Income Statement (Nmn)

2012

2011

Revenue

1,487,484

1,362,715

Cost of sales

(921,892)

(824,665)

Gross profit

565,593

538,050

Distribution expenses

(42,314)

(275,668)

Administrative expenses

(500,936)

(244,878)

Operating expenses

(543,250)

(520,546)

Operating profit

22,342

17,504

Investment income

18,359

1,820

Other gains and losses

46,024

23,119

Other income (all)

64,383

24,939

(115,559)

(122,747)

(28,834)

(80,304)

1,887

26,213

(26,947)

(54,091)

Finance costs
Loss before tax
Taxation
Loss for the year

Comments
9% top line growth, vs. industry's 6% (ex. CAP, 21%). Limited pricing
power on sustained competitive pressures. New distribution strategy
paying off.
Production inefficiencies, on higher input costs constrained earnings
performance
Slower gross profit growth, resuled in gross margin contraction.

Improved distribution efficiencies, due to a more robust product

distribution channel on an extensive depot upgrade and expansion
programme.
Less impressive internal cost management. The strategic drive to
rationalize and optimize resources (possibly through internal
restructuring) should be intensified.
Input cost pressures, amidst lower distribution, but higher administrative
expenses resulted in improved operating efficiencies and a stronger
growth in operating profit, vs. an operating loss recorded in 2010.

Partly as a result of high yields on fixed income instruments

A significant reduction from prior years, on greater reliance on internally
generated revenues, significant loan restructuring and by accessing the
BOI/CBN Intervention Fund
Significant reduction in pre-tax losses from prior years, points to benefits
from ongoing restructuring programme.

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A Chapel Hill Denham Company

DN Meyer Financials Balance Sheet

Balance Sheet (N000)
Total non-current assets
Property, plant &
equipment
Intangible assets
Deferred tax assets
Investment property

2012

2011

Comments

1,799,413

1,855,818

160,888
1,960,301

463
176,669
128,360
2,032,950

331,140
118,352
5,526
166,100
621,118

342,020
61,908
5,732
286,088
695,748

Total assets
Non-current Liabilities
Deferred tax liabilities
Borrowings

2,581,419

2,728,698

431,590
673,288

454,913
714,422

Employee benefits
Finance Lease Obligations

20,262
3,750
1,128,890

16,488
4,681
1,190,504

533,044
256,745
2,372
9,970
802,131
1,931,021
650,398

653,226
182,906
14,415
8,551
859,098
2,049,602
670,096

Total current assets

Inventories
Trade and other receivables
Other assets
Cash and cash equivalents

Current liabilities
Trade and other payables
Short term borrowings
Finance Lease Obligation
Current tax liabilities
Total Liabilities
Total equity

Possibly more liberal sales policies.

Negative working capital; historical reliance on loans to finance WC needs.

Potentially negative for future earnings outlook.

Liquidated & restructured facilities under the CBN/ BOI Intervention funds.

- May need to recapitalize to balance sheet to support future growth.

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African Paints (Nigeria) Plc - Background

About the company
African Paints (Nigeria) Plc was incorporated as a limited liability company in 1974 and commenced business
in 1977.
The company was converted to a public company in 1993, with its shares being listed on The Nigerian Stock

Exchange on July 30, 1996.

The company is the first indigenous paint manufacturer in Nigeria.
The principal activities of the Company are the manufacture and distribution of marine, protective, decorative
and auto-refinish paints.

In addition, the company produces texture-finish, industrial finish, wood finishes and lacquers.

Common Dealer Complaints

Risks

Investment Case

No credit offerings

Intense competition

Growth potential

Slow delivery time

Lack of working capital

Range

High input cost

Ageing
equipment

facilities

of

Standard

and

premium brands

and

Weakened industry positioning

Chapel Hill Advisory Partners Limited

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Overview of African Paints

2012

2011

(Nbn)

Market Information

Value

BALANCE SHEET
Total Assets

0.403

0.418

Total Liabilities

0.287

0.329

105

89

Net Assets

Share Price (N) as at 16 September, 2013

2.86

Shares Outstanding (Million)

368.46

PREMIUM AND PROFIT

Revenue

0.23

0.58

Profit/(Loss) before taxation

0.27

-0.49

Profit after taxation

0.26

-0.50

Market Capitalization (Nmillion)

1,053

Company shareholding structure

Nigerian
Shareholders
, 30%

Alhaji
Amusan
, 6%

Charing
Management
Limited, 60%

Gbenga
Akinnawo,
11%

Sources: Company Accounts, CHD Analysis

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African Paints Key Performance Metrics

STRENGTHS
Top Quality Products
Very Strong brand
Competitively priced
Good variety of colour options
OPPORTUNITIES
Oil & gas and marine sectors, given the campaign/drive for local content in the petroleum industry
Also in decorative products as campaign to lessening the housing deficit begins to gain traction
Infrastructural development in general road markings etc
WEAKNESSES
Production facilities in need of an overhaul
Lack of working capital
Strengthening of technical team and management
Lack strong presence (little or no marketing)
THREATS
Smaller, informally organized indigenous paint makers (not necessarily companies) (making inferior
products which are sold much cheaper)
Imports; passing off of cheaper products branded as the companys.

11

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African Paints Profit and Loss

12

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African Paints Balance Sheet

13

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Market Comps
Price (N)

Market Cap.
(N'mn)

Net debt (N'mn)

EV (N'mn)

SHF (N'mn)

Total debt
(N'mn)

Berger

8.70

1,891

-749

1,142

1,774

CAP

43.40

30,380

-1,267

29,113

1,119

DN Meyer

1.78

579

763.9

1,342

650

930

Portland

4.51

1,804

-82

1,722

952

Premier

10.93

1,344

-5

1,339

12

62

African Paints

2.86

1,053

80.4

1,277

116.07

80.5

Company Name

Net Debt/ Equity (%)

EV/Sales (x)

Price/Book (x)

Debt/Equity (%)

Berger

-42.2%

0.5

1.1

0.4%

CAP

-113.3%

5.6

27.2

0.0%

DN Meyer

117.5%

0.3

0.9

143.1%

Portland

-8.6%

0.6

1.9

0.3%

Premier

-46.1%

5.2

113.0

517.3%

African Paints

69.3%

54.39

6.41

69.2%

Average

-42.2%

0.60

1.9

0.4%

Company Name

Sources: Company Accounts, CHD Analysis

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14