The brewing industry appears to have been thriving in the last decade, attracting the biggest names in the global brewing business such as Diageo, which deals through Guinness Nigeria; Heineken, which owns majority shares of Nigerian Breweries, and SAM Miller that acquired some of the largest brewing factories in the eastern part of the country.
Though Nigeria’s beer industry is a very vital component of Nigeria‘s non-oil sector, which has largely contributed to economic growth in recent times, various factors have interfered to alter the dynamics of the alcoholic beverage market. Notable among the changes to the architecture of alcohol business in the country is the rising to prominence of a new variant of alcoholic drinks, which mixes bitters with spirit. For instance, the introduction of Alomo Bitters produced by a Ghanaian company, Kasapreko Limited, in Accra, led the charge of this category of beverages.
Consequently, the market share of all other alcoholic brands has been re-configured and the beer brands have suffered a significant loss of market. The audited results of some of the companies in the industry since 2013 has not been encouraging and the expectations was that the subsequent results will be brighter enough to erase the negatives in the accounts, but, unfortunately, the trend has continued unabated. However, while it was accepted generally that the overall economic and business climate was a mixed fortune due to mounting economic challenges, Nigerian Breweries Plc had fairly maintained stable trend in share prices and financials.
But the company’s financial results since the year end 2014 has shown a reversal, as the difficult business environment has made the company unable to sustain its performance despite innovative and proactive responses to market dynamics and competitive pressures. Market watchers attributed the depletion in revenue to stiff competition and drop in the value of naira. Stockbrokers said that wary investors are still reacting and taking position in the shares of the company based on the current figures.
Nigerian Breweries Plc was not insulated as its share price movements has also receded and remains susceptible to the challenges facing the manufacturing businesses in Nigeria due to the upset in financial sector following drop in oil prices and currency devaluation.
The company had its fair share of the current lull in the market following massive profit taking that saw the market lose considerable chunk of investors’ wealth. The share price, which closed at N175.00 per share on August 30, 2014, stood at N126.99 when the closing bell rang last Friday. This indicates a decrease of N48.01 or 27.43 per cent year to date.
Financials
Nigerian Breweries Plc is currently the second most capitalised company on the Nigerian Stock Exchange (NSE) with market capitalisation of N1.006 trillion after Dangote Cement Plc. The brewery giant, which ended the year 2013 on a positive note with a profit after tax of N43.08 billion for full-year 2013, indicating some 13.2 per cent rise on the N38.043 billion it posted in the preceding year, reversed the trend of profit growth. It posted marginal drop in profit in the financial year ended December 31, 2014.
This was contained in the company’s audited financial statements for the year ended December 31, 2014, submitted to the Exchange. The company recorded 1.3 per cent decline in profit after tax from N43.080 billion earned in 2013 to N42.520 billion in 2014. The beer maker began its first quarter (Q1) 2015 pre-tax profit also with a slight decline of 1.85 per cent Year-on-Year (Y-o-Y) and 23.52 per cent Quarter-on-Quarter (Q-o-Q) to N14.45 billion. According to Cordros Research, the decline followed a 113 per cent Y-o-Y and 2.43 per cent Q-o-Q rise in net finance charges.
“Elevated finance charges came on the back of higher interest rate – according to management – and increased borrowing, which was apparent in an 84 per cent surge in total debt (particularly bank overdraft, from De-cember 2014),” the report added. Profit after tax (PAT) grew by a marginal 0.42 per cent Y-o-Y to N10.1 billion due to a 158 basis points (bps) Y-o-Y dip in effective tax rate to 30.03 per cent. “The poor Q-o-Q performance – PAT down 20.41 per cent – is customary given that Q4 is usually the strongest quarter for brewers,” the report noted.
The top Nigerian beer maker’s first quarter ended 31 March, 2015, which included the figures of Consolidated Breweries Plc (CB) following last year’s merger, shows that the combined revenue grew marginally Y-o-Y after successive declines recorded by NB pre-merger, in Q3-2014 (-5.74 per cent) and Q4-2014 (-8.53 per cent). “The marginal increase in revenue was disappointing as it is yet to account for the anticipated synergetic benefit (in terms of volume) of NB’s merger with CB,” the Cordros report affirmed.
The decline in bottom line continued following 10.02 per cent decline in profit after tax for the half year ended June 30, 2015. The statement of financial position as at the period under review showed profit after tax dropped by 10.02 per cent to N21.477 billion during the six-month period to June 30, as against N23.871 billion in 2014, while pre-tax profit equally shed 8.53 per cent to N30.989 billion in 2015 from N33.882 billion in 2014. However, gross earnings firmed up to N151.673 billion in 2015 as against N141.495 billion recorded a year earlier, indicating a growth of 7.19 per cent.
Analysts’ view
According to analysts at Renaissance Capital, the 1H FY15 numbers were poor across the board, as they had anticipated. “Unfortunately, we do not believe the pain is over yet. We have lowered our industry and company growth forecasts for FY15 and FY16, as the consumer remains severely constrained. We expect further downside to margins given pressure on the naira. Furthermore, we believe Bloomberg consensus estimates remain high and that a FY15E P/E of 24.5x, on our estimates, without growth, is not justified.
We maintain our SELL rating and lower our TP to NGN118 (from NGN138) on our revised forecasts and disappointing results,” they said. The analysts noted that they found little evidence that the Buhari victory has helped consumer sentiment and spending thus far. “In fact, we believe things will get worse before they get better.
NB’s 1H FY15 results were testament to this, with margins and earnings having declined QoQ and YoY. We have lowered our beer industry growth forecasts to 0 per cent from 4 per cent for FY15 and to 2 per cent from 6 per cent for FY16. Furthermore, as evidenced by July 22 current account data, the naira is likely to face further pressure, thus we believe gross margins for NB will move lower reaching a trough of 43 per cent in FY16 from 46 per cent in 1H FY15 on the back of another 10 per cent currency devaluation.
Operating margins could also move closer to 18 per cent in FY16 from the 22 per cent recorded in its recent results,” Renaissance Capital said. Financial analysts at the FBN Capital however said that the sales growth was an improvement over the flattish y/y performance delivered by the company in Q1 2015.
“We believe that the sales growth reflects a favorable pricevolume mix, due to price increases of less than 5 per cent implemented towards the end of Q1 2015. Further down the P&L, the combination of a -644bp contraction in gross margin to 45.6 per cent, a 10 per cent y/y increase in opex and a 13 per cent y/y increase in net interest expense led to PBT falling by -14 per cent y/y,” they said.
Outlook
Managing Director/ Chief Executive officer, NB Plc, Mr. Nicholas Vervelde, explained that the merger with Consolidated Breweries, which is based on a significant and compelling strategic rationale, will enable the combined business to fully capitalise on the future growth potential of the highly attractive Nigerian beer and malt drinks market. Vervelde said that the transaction is expected to create value for all key stakeholders, particularly shareholders, drive benefits from increased economies of scale, enhance operating and administrative efficiencies and increase the new company’s speed and agility in response to market developments.
Conclusion
Though high cost of operations have significantly weighed down on the real sector of the economy, it is expedient for the brewery giant to continue to manage its cost base tightly to deliver moderate operating margins improvement for growth and profitability.
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