Company Overview

ACADEMY was incorporated as a private limited liability company in 1964. It was converted to a public limited liability company in 1991. Thereafter, its shares were quoted on the Nigerian Stock Exchange.

ACADEMY is a reputable printer of educational and general books. The company’s range of products includes periodicals, annual reports, diaries, calendars and labels, and security documents.

High Chief (Sir) Simeon Oguntimehin chairs an eleven-man board while Mr. Olugbenga Ladipo holds sway as the Managing Director. Alidan Investment Limited controls 13.9% while West African Book Publishers Limited has 10.4% of the company. The directors have 3.7% of the shares of the company
(2016: 4.1%).

Investment Thesis

Earnings growth has been erratic over the past seven years. Despite the government’s support for the company in the form of soft loans, ACADEMY has performed poorly, achieving a 3.4% dip in top line (on a three-year compound annual growth rate), while net earnings were depressed by 277.1%.

The company has not turned the corner, judging by its recently released results for the third quarter ended 31 December 2017. Revenue rose 14% from NGN1.4 billion to NGN1.6 billion, while the company had a Loss Before Tax (LBT) of NGN122 million compared to a LBT of NGN283.6 million of the corresponding period of the preceding year. Similarly, gross profit declined marginally by 1.8% to NGN452.1 million at the end of the third quarter. However, cash flow from operations inched up 4.2% from NGN390.6 million to NGN406.9 million.

Ongoing investments to upgrade its capacity have been largely financed by loans. This, no doubt, will impact performance going forward. But we believe ACADEMY is hugely indebted; debt to assets is 44.3% while debt to equity is 485.5%; its liquidity ratios are low (current and acid test ratios are 0.6 and 0.4, respectively). In addition, 34.3% of its total debts are current in nature, and its net earnings do not cover its debts. Total assets cover total debts 2.3 times.

The industry is fragmented; equipment upgrade without expanding to other countries makes it difficult to spread risk and diversify income. Overcapacity is worsened by intense competition that may put downward pressure on prices, resulting in low profitability.

Though it trades below our fair value estimate, ranging from NGN1.00 to NGN1.50, we would advise investors to be patient and watch as things pan out.

Valuation

Our fair value estimate for ACADEMY is between NGN1.00 and NGN1.50 using the Discounted Cash Flow (DCF) Model. At its recent price of NGN0.50, the shares are underpriced. We anticipate a three-year return of 64.2%.

Financial Overview

Its 2017 results showed that revenue increased by 3.4% in 2017 compared to a decline of 11.4% in the previous year. Books produced 86.9% of total revenue and 76.1% of the gross profit. Gross profit declined due to a 31.8% hike in raw materials cost. Cost of raw materials accounted for 82.1% of revenue compared to an 8-year average of 66.7%. Administrative expenses rose by 66.2% compared to a 3.3% fall in the previous year. In a nutshell, costs are rising and unstable. ACADEMY had an operating loss of NGN269.6 million compared to an operating profit of NGN85.7 million recorded in the year before.

Profit margins worsened in the year under consideration. Besides, returns to shareholders have not been encouraging over the past two years. Both Return on Equity (RoE) and Return on Assets (RoA) have been negative over the past two years. Shareholders have not been adequately compensated by way of dividends in the past two years. Book Value Per Share was NGN0.37, down from NGN1.2 of the previous period.

Management should embark on better working capital management to avoid liquidity problem. ACADEMY is a high-geared company, and operating profit hardly covers interest obligations, though its operating cash flow has been covering it. Shareholders’ fund decreased from NGN715 million to NGN245.9 million, losing a hefty 65.6% in a year.

Business Risk

It may be difficult to keep up with the pace of technological change without adequate resources at its disposal, without going deeper into debt. The competitiveness and profitability of the industry are endangered by overcapacity resulting from increased performance of equipment against stagnant or slackening demand. Digitisation and information technology have a great impact on print demand.

Recommendation: Hold