What could be wrong with this company as despite showing strong earning growth they continue to churn out very poor profit margins? The answer probably lies in the cost of doing business.

Five years ago, just after my wedding, my wife and I decided to spend our honeymoon in the Gold Coast popularly called Ghana. At that time Ghana was just becoming an increasing tourist destination for Nigerians. The rising influence of Ghana as a popular travel destination didn’t go unnoticed by businesses in Nigerians. More airlines plied that route to cash in on tourist, businessmen, students etc who had one reason or the other to be in Ghana.

ABC Transport, the leading cross-state road transportation company in Nigeria obviously saw an opportunity to serve teeming travelers who could not afford to fly by giving them an alternative that is cheaper, safe and equally enthralling. I fell in love with ABC on that trip and so decided to purchase their shares whenever I had money.

I purchased ABC Transport shares in 2008 at a price of N2.35, today the shares trade for just 50kobo. At 50kobo per share the company’s shares are trading at its nominal price meaning it technically is at its rock bottom price and cannot go below that. It has traded for 50kobo for a while now with no sign of itching upwards. Just what has happened to my darling ABC? To find out we can look no further but to its financial results over the last 4 years. In 2008 when I bought shares, ABC it had a turnover of about N3.9b and Profit after tax of N167m. The turnover was a 23.8% rise from the prior year whilst the PAT was a 18.3% rise from the prior year as well. Fast forward to 2011 and the turnover remains at a high turnover at N5.8b but with a loss of N68m. Just what could be wrong? A look at the years in between 2008 and 2011 reveals a slippery slide into the abyss of losses.

2009 2010 2011

Turnover N4b N4.6b N5.8b

Profit/(Loss) N85m N57m (N68m)

Profit Margin 2.1% 1.2% -1.17%

Operational Expenses very high

What could be wrong with this company as despite showing strong earning growth they continue to churn out very poor profit margins? The answer probably lies in the cost of doing business. Operating Expenses (Cost of sale ) for the company was N3.1b and 4.6b in 2010 and 2011 respectively giving them a gross profit margin of 32% and 30% for the respective years. This puts their business within a highly competitive environment as they try to out wit new entrants and competition with better services, employ more direct labour (such as drivers, grounds men, cleaners), grapple with fuel and diesel cost, maintenance etc. In 2010 for example, the low gross profit margin of 30% just leaves them little for administrative expenses. Consequently, operating profit for both years were N460m and N393m for 2011 and 2010 respectively. An operating profit of 25.8% and 26% for 2011 and 2010 respectively, though showing a business model with high overheads, is still considered moderate. Despite the impact of operational cost the company still is able to make operational profit of N460m and N393m for both years. However, it is paltry when you consider that it is a meagre 7.9% and 8.5% of turnover for 2011 and 2010 respectively. A sure sign of little or zero profits if the company has loans and pay taxes.

Finance Cost

Expectedly ABC has loans and thus pays interest on it. Unfortunately, at the time of this review I could not find a copy of their annual report to determine the tenor and terms of the loans. However interest on loans cost them N386m and N220m for 2011 and 2010 respectively. That is a whopping 84% of operational profit for 2011 and a high 56% of operating profit for 2010. At this stage it is easy to expect an inevitable loss position for 2011. Being the only quoted transport company in Nigeria one cannot know if this level of interest to operating income margin is prevalent. However, a company with an interest to operating income percentage of over 25% is usually in a highly competitive environment and shows probably has very little competitive advantage.

Taxes

Taxes are a standard for any company without a pioneer status. The standard rate in Nigeria is 30% of Profits. However, that percentage can be as low as 9% if the company has enough qualifying capital expenditure to benefit from the relief capital allowances gives. For ABC Profit before tax was N72m and N172m in 2011 and 2010 respectively. Taxes came at N141m and 114m for 2011 and 2010 respectively leaving the company in an effectively loss position of N68m in 2011 and a marginal profit after tax of N57m in 2010.

Finally

Without the company’s Published Annual Report it is difficult to perform a financial diagnosis of what the company’s challenges really are. Even though we know operational cost are quite high, it will be nice to determine why. I do know that they operate in an environment where competition is stiff with little or no barrier for new entrants. Just about anyone can put up a bus on the road and begin transporting people to any part of Nigeria. It may also seem the directors and major stakeholders are happy with the way things are as the company is growing revenues despite low returns to shareholders. For some like the directors, they statutorily collect their fees and emoluments which in a way is a form of returns on investments. Staff also get paid salaries whether or not the business is profitable or not. This highlights the problems with quoted companies in Nigeria where Management also double as major owners and as such do not feel the pressure to turn things around. For shareholders like me who can’t get rid of them with our inconsequential votes the only option is to sell my shares at a huge loss. Even that depends on the availability of buyers who seem unattracted to the company.

NB
Financials here and here

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Editor’s note: Op-ed pieces and contributions are the opinions of the writers only and do not represent the opinions of Y!/YNaija.