Earnings Report /
Bangladesh

Singer Bangladesh: 52% YoY profit decline because of margin dent and higher finance expenses

  • Increase in financial expenses & 402bps dent in margin are attributable decline in profit despite 9.4% sales growth.

  • Opex to sales ratio decreased because of decline in demurrage cost

  • We recommend HOLD with TP of BDT 170.0 (ETR 12.3%)

IDLC Securities
24 July 2022
Published byIDLC Securities

SINGERBD reported BDT 1.40 EPS in Q2 CY22 vs BDT 2.89 EPS in Q2 CY21. Increase in financial expenses and a 402 bps dent in gross margin are attributable to 51.5% YoY decline in bottom-line profit despite 9.4% sales growth. 6M bottomline similarly dropped by 50.7% YoY due to 60%+ rise in financial expenses and290 bps dent in gross margin. Sales revenue increased by 9.4% YoY in Q2 CY22. Because of hike in commodity prices, point to point inflation stood at 7.6% in June 2022, which is the highest in nine years. During high inflation, discretionary spending falls as people scramble to afford essentials. Considering such bottleneck, this 9.4% sales growth seems modest. Please note that, during 6M CY22 revenue rose by 7.4%.

The gross margin declined by 402 bps YoY in Q2 CY22. Gross margin for Q2CY22 fell to 21.3% from 25.3% in Q2 CY21. As commodity prices in the international market rise, so does Singer’s costs of raw materials which mostly consist of plastic and iron. On top that, BDT depreciation against USD stood at 10% yoy which further increased the costs. SINGERBD could not pass these costs on to the end consumer due to inflationary pressure. Although SINGERBD raised prices for certain goods, it still was not sufficient to cover their costs. This drop in margin is the prime reason for profit decline.

Opex to sales ratio decreased because of decline in demurrage cost. Opex to sales in Q2 CY22 dropped to 15.3% from 15.7% in Q2 CY21. In Q2 CY21, SINGERBD incurred demurrage costs due to supply chain delay for raw materials import and paid BDT 109mn in clearing goods from the port. The pandemic affected logistics by increasing port delays and subsequently demurrage costs. The supply chain situation improved over the year. Singer paid BDT 11mn demurrage costs in Q2 CY22. For this reason, opex to sales decline in Q2 CY22 YoY.

Finance expenses increased by 52.8% YoY. SINGERBD increased its inventory and receivables in Q1 and Q2 targeting the summer and EID festival sales. It required investment in working capital which increased the debt level by BDT 3.4bnfrom BDT 7.1bn to BDT 10.4bn. As a result, interest expenses increased by 52.8%YoY in Q2 CY22 and by 62.7% YoY in 6M CY22.

We recommend HOLD with TP of BDT 170.0 (ETR 12.3%). We revised Singer’sTP downwards from BDT 225 (-24.4% revision) because of substantial earnings revision for 2022 and 2023 considering inflationary pressure, commodity price hike and currency depreciation. We value Singer at 20.2x 2023f PE, 1.1x 2023EV/sales.