Nigerian Brewers: Going through a Rough Patch
Goddy Egene writes that weak consumer demand, high cost of finance and security challenges are some of the factors that have impacted negatively on the performance of breweries in the country
Nigerian Breweries revenue growth has been quite modest and margins flattish due to negative brand mix. Earnings have consequently come under pressure, with PAT growing 0.4 per cent average between 2012 and 2015 (compared to 20 per cent between 2008 and 2011)
Nigeria is a market that manufacturers of consumer goods will always want to be considering its larger population. Many companies see the population as a big market where they can sell their products and make significant profits. While the huge population still exists and many companies have made profit in the past, things are changing fast.
Despite the population, companies are witnessing shrinking revenue and lower profits. Some are even recording losses due to economic headwinds. The brewery sector is not insulated from these challenges, which have dictated their performance. The financial performances of the breweries operating in the industry and listed on the Nigerian Stock Exchange (NSE) have shown mixed grill. While the leading breweries witnessed some decline in their bottom-lines, small players are improving on their performances.
Industry Operators
The Nigerian brewery has a 15 million hector litres market and dominated by two operators and some marginal players. The market is controlled by Nigerian Breweries Plc and Guinness Nigeria Plc, which have a combined market share of 95 per cent. Both companies have Heineken and Diageo respectively as their parent firms.
Heineken, through Nigerian Breweries, controls about 71 per cent share of the market while Diageo has about 27 per cent market share through its stake in Guinness Nigeria Plc.
Apart from Nigerian Breweries Plc and Guinness Nigeria Plc, there are also International Breweries Plc, Champion Breweries Plc, Premier Breweries Plc and Golden Guinea Breweries Plc that listed on the NSE. But Premier Breweries and Golden Guinea have been inactive for some time.
Statistics published by Heineken showed that the Nigerian beer market will record a compound annual growth rate of 5.6 per cent between 2011 and 2020. However, the strong long-term outlook notwithstanding, the industry is going through a rough patch at present due to challenges in the operating environment. The factors affecting the sector include increase in the cost of living, which has depressed consumer spending, pressures from foreign exchange rates as well as distribution challenges stemming from security concerns and poor infrastructure.
Nigerian Breweries
A look at the financial performance of Nigerian Breweries over the past years to December 2015 showed a moderate growth affected by the economic challenges and high cost of finance. Revenue that was N230.1 billion in 2011, improved to N252.6 billion in 2012, rose further to N268.6 billion in 2013. However, it fell marginally to N266.37 billion in 2014 before rising again to N293.9 billion in 2015.
In terms of profit before tax (PBT), Nigerian Breweries posted N56.3 billion in 2011, fell to N55.6 billion in 2012. It rose to N62.2 billion in 2013 before falling to N61.4 billion in 2014. PBT fell further to N54.5 billion in 2015. An analysis of the profit after tax (PAT) shows the same trend, with PAT at N38 billion in 2011 and 2012. It rose to N43 billion in 2013 and fell to N42.5 billion before it declined further to N38 billion in 2015.
One of the factors that have affected the bottom-line is the high cost of debt funding by the company, which raised the cost of finance from N1.604 billion in 2011 to N7.714 billion in 2015. The cost of finance hit a high of N9.547 billion in 2012 before it declined to N7.483 billion and further to N5.39 billion in 2014. The cost of finance, however, rose to N7.7billion in 2015. But the company adopted an alternative funding means of commercial paper last year that is expected to bring down the cost of funding going forward.
By the end of June 30, 2016, Nigerian Breweries recorded a PAT of N19.1 billion, down from N21.477 billion in the corresponding period of 2015. Finance cost was still an issue in H1 of 2016, jumping from N2.917 billion in 2015 to N8.392 billion in 2016.
The company explained that it was able to deliver top line growth with revenue increasing by four per cent compared to the first six months of 2015.
However, it added that rising inflation combined with higher inputs costs as a result of scarcity of foreign exchange, led to a flat operating profit compared with the preceding year.
“Despite a lower interest cost from the Commercial Paper Programme, PAT declined by 11 per cent, mainly due to foreign exchange losses arising from the rates going up in June. Although
the board expects the operating environment in 2016 to remain challenging for the rest of the year, the company remains focused on its twin agenda of cost leadership and market leadership supported by innovation and the board remains positive on the Nigerian market for the medium and long term,” the company said.
Commenting on the company’s performance, analysts at Cordros Capital Limited said although Nigerian Breweries Plc has performed resiliently (given its rich portfolio of products), it is not completely insulated from the challenges in the economy.
According to them, Nigerian Breweries revenue growth has been quite modest and margins flattish due to negative brand mix. Earnings have consequently come under pressure, with PAT growing 0.4 per cent average between 2012 and 2015 (compared to 20 per cent between 2008 and 2011).
“Nigerian Breweries reported Q1-2016 result that beat consensus expectation. Revenue grew in low double-digit (10.9 per cent y/y), while pre (3.9 per cent y/y) and post tax (3.5 per cent y/y) profits grew in low single-digits, each. Worthy of acknowledgment is the fact that a close competitor (Guinness Nigeria Plc) posted operational loss during the same three months period. Notwithstanding the strong start to the year, we look for 2016 revenue growth of five per cent and 10 per cent decline in post-tax profit (previously +5 per cent). On revenue, we do think the macro environment is strong enough to sustain the base-effect driven growth seen in the first quarter. On the profit line, primary headwinds are: the adverse impact of forex and energy driven cost inflation on margins and significant unrealised forex loss following the floating of the Naira,” Cordros Capital said.
Guinness Nigeria
The bottom-line of Guinness Nigeria has maintained a steady decline over the past five years. Revenue stood at N123 billion in 2011. Rose to N126 billion in 2012 and further grew to N131.4 billion in 2012. However, revenue declined to N109 billion but improved to N118 billion in 2015.
PBT recorded a decline from N26.2 billion in 2011 to N21.1 billion in 2012. It declined further to N17 billion in 2013, N11.6 billion in 2014 and N10.7 billion in 2015. PAT fell from N17.9 billion in 2011, fell to N14.6 billion in 2012, N11.86 billion, in 2013, N9.57 billion in 2014 and N7.79 billion in 2015.
High cost of finance has also been a drain on the bottom-line of Guinness. From N1.513 billion in 2012, finance cost rose to N3.605 billion in 2013 and N4.441 billion and N4.872 billion in 2015.
As at March 31, 2016, which is nine months of its operations, Guinness Nigeria recorded 83 per cent in PAT to N864 million from N5.216 billion in the corresponding period of 2015.
An analysis of the nine months results showed that Guinness posted revenue of N69.618 billion in 2016, down by 16 per cent from the N84.75 billion in 2015.
However, the management strived to reduce costs as cost of sale, marketing and distribution expenses, administrative expenses, net finance cost went down.
Net finance cost was also reduced by 32 per cent from N3.4 billion to N2.3 billion. Despite that PBT fell from N7.134 billion to N1.204 billion. Although Guinness cut its tax payment by 82 per cent, from N1.917 billion to N340 million, it ended the nine months with a PAT of N864 million, compared with N5.216 billion in 2015.
On a quarterly basis, Guinness actually recorded a decline of 33 per cent in revenue in the third quarter from January to March 2016 and loss after tax of N309 million compared to a PAT of N1.8 billion in Q3 of 2015.
However, the Managing Director of Guinness, Mr. Peter Ndegwa had assured stakeholders that the company expected to see some improvement in sales with innovation and the distribution of Diageo’s international premium and mainstream spirits brands which have been integrated into its business.
In their comments, analysts at FBN Quest said apart from the challenging macro-environment, we believe that Guinness’ limited representation in the value category has been a major factor constraining topline growth.
“Although the wide market acceptance of“Orijin”, Guinness Nigeria’s herbal brand, supported topline growth in FY 2015(end-June), we believe that the marked slowdown in that category contributed to the weak growth on the topline. Given the challenges with sourcing transportation fuel in the last few months, it may also be that the company was faced with logistics/distribution issues during the quarter,” they said.
International Breweries
International Breweries Plc has performed well, recording growth in top and bottom-lines in last five years. Revenue rose from N9.908 billion in 2011 to N3.2 billion in 2015, while PAT jumped from N147 million in 2011 to N2.6 billion in 2015.
A breakdown of the performance showed that revenue rose from N9.908 billion in 2011 to N17.38 billion in 2012, N18.49 billion in 2013, N20.649 billion in 2014 and N23.269 billion in 2015. PBT rose from N190 million in 2011 to N3.734 billion in 2012, N3.925 billion in 2013, N2.815 billion in 2014 and N3.656 billion in 2015, while PAT grew from N147 million in 2011 to N2.506 billion in 2012, fell to N2.106 billion and N1.946 billion in 2014 before rising to N1.709 billion in 2015.
Champion Breweries
Champion Breweries has also witnessed improved fortunes in the last few years, recovering from loss position to profitability in 2015. The company had challenges due to huge debt overhang but the company ended 2015 with a profit after recording a loss in 2014.
Addressing shareholders recently, the Chairman of Champion Breweries Plc, Dr. Elijah Akpan, said revenue increased to N3.5 billion from N3.3 billion in 2014 while operating profit was N207 million as against N26 million recorded in 2014. Also, PBT was N210 million, up from N1.1 billion loss recorded in 2014.
He assured shareholders that the company would sustain the positive performance recorded in 2015 and achieve dividend payment very soon.
“The company’s successful conclusion of debt re-financing, increase in production and sales volume of Champion Lager Beer as well as re-introduction of Champ Malta has resulted in positive turnaround of the business performances during the year,” he said.
He assured the shareholders of better days ahead, saying they will soon start enjoying the dividend of their investments.
“Considering our present financial position from deficit to surplus, our company has the right mindset and structures to achieve payment of dividend to you our dear esteemed shareholders in no distant time,” Akpan said.
Share price performance
A look at the share price performance of the companies as at the close of trading on Monday indicates that International Breweries Plc has recorded the best performance. Although Nigerian Breweries Plc has the highest share price at N137.99, it has recorded a marginal growth of 1.46 per cent since the beginning of the year. Guinness Nigeria, which has a share price of N94.50, it has declined by 21 per cent, underperforming the NSE All-Share Index. However, International Breweries Plc has appreciated by 21.2 per cent to stand at N19.38 per share, while Champion Breweries Plc has recorded an appreciation of 8.6 per cent to close at N3.66 per unit.
The bottom-line of Guinness Nigeria has maintained a steady decline over the past five years. Revenue stood at N123 billion in 2011. Rose to N126 billion in 2012 and further grew to N131.4 billion in 2012. However, revenue declined to N109 billion but improved to N118 billion in 2015