Analysts recommend sell for 7Up shares on proposed minority shares buyout

Seven-Up Bottling Company Plc. recently informed the investing public of the plan by Affelka S.A – the holder of 73.0 percent of the company’s shares outstanding – to completely buyout minority shares in 7UP for a consideration of N112.70 per share relative to the market price of N97.12 as of December 7, 2017.

The Board of 7UP in a statement to dealing members of the Nigerian Stock Exchange said Affelka S.A has made an offer to acquire all 171,542,574 outstanding shares of the company not owned by Affelka.

While the planned purchase is still subject to approval by the shareholders at a court-ordered meeting, the company has received a “No Objection” from the Securities and Exchange Commission (SEC).To this end, market analysts are recommending that the minority investors tender their shares for sale.

“Following the planned acquisition of the ordinary shares of investors, minority investors are faced with the decision to either “SELL” or ‘HOLD”. On the consideration of the options, our overall analysis favours a “SELL” decision,” analysts at Afrinvest said.

Their sell decision is premised on illiquidity, weak investor sentiment and the premium pricing on offer. They claim that in the event that the shares of minority shareholders are being bought over, investors who decide to “HOLD” would be faced with illiquidity challenge associated with the stock.

As such, prices of the stock will remain rather unreflective of fair market pricing, thereby indicating an increasing likelihood of a substantial loss in value of investments.

They also point to the fact that the share price of 7UP has suffered negative investor sentiment on the back of disappointing performance scorecards with a year-to-date loss of 32.8 percent, underperforming that of the consumer goods index (+37.1percent) and benchmark index (+47.1 percent) as of December 7, 2017.

“More so, despite investor’s negative sentiment for the stock our outlook for Full Year:2017 performance remains rather bleak given the company’s high leverage and cost inefficiency,” they noted.

However, the premium pricing on offer seem the bait for investors to sell. “Despite the underwhelming performance so far in the year, the offer price of N112.70 presents an attractive opportunity for investors to recoup losses which have weighed on portfolio and invest in more liquid and fundamentally driven stocks to boost overall portfolio performance,” they stressed.

They added: “Given the recent weak financial performance, historical illiquidity characterizing 7UP as a stock – which will possibly worsen post-acquisition – and the premium offered by Affelka relative to the current market price, we recommend investors tender their shares for the price consideration.”

Apart from the above conditions precedent to the offer, the historical financial performance of the company is also a case for the minority shareholders to sell.

In its Full Year:2016 financial results, 7UP’s performance deteriorated on the back of rising direct and indirect cost profiles as well as finance charges despite growing revenue considerably.

The company recorded a N108.3 billion expansion in revenue and a loss after tax of N10.8 billion. Specifically, revenue rose 26.5 percent year-on-year from N85.6 billion in 2016 to N108.3 billion in 2017. However, performance remained primarily supported by local sales (up 26.3 percent to N108.0bn) despite remarkable growth in exports to neighbouring countries (up 1430.7 percent to N274.0m).

Nevertheless, faster growth in cost of sales (up 57.4 percent to N95.3bn) muted the growth in top line despite marginal support from other Income (up 34.5 percent to N427.0m).Sustained high net finance costs (up 25.0% Y-o-Y to N4.0bn) dragged profitability, receding from a profit after tax of N3.3bn in 2016 to a loss after tax of N10.8 billion in 2017.Similarly, in its H1:2017 interim report, 7UP recorded a loss after tax of N3.8 billion. Revenue for the period rose 5.4 percent Y-o-Y to N21.5 billion while cost of sales stayed flattish at N18.2 billion – albeit taking up 84.0 percent of revenue.

Likewise, Net finance costs continued the uptrend, surging 96.9 percent Y-o-Y to N1.9 billion thereby bringing the company to a loss after tax of N3.8 billion.Seven-UP’s performance has remained underwhelming in recent time especially in terms of cost efficiency and finance cost. This will continue to put pressure on share Zimbabwe to relax black ownership Laws, cut spending,.