NIGERIAN BREWERIES PLC: Earnings dampened by tough foreign exchange environment

2017 from 32.74% as at full year 2016.

International Breweries Plc was incorporated as a private limited liability company on 22 December, 1971 and became a public limited liability company on 26 April, 1994. The Company recently released its full year result for the period ended March 2017 showing a mixed performance of significant rise in sales propelled by increases during the festive seasons. Nevertheless, a number of operational bumps were also noted due to inherent macroeconomic factors leading to decline in profitability. The company’s management has kept up with its regular dividend payment, and has recommended a total dividend payment of N28.54 billion (on the basis of N3.60 per share) for every 50 kobo share, which is lower than the N4.70 per share paid last year.

FINANCE COST HAMPERS PROFITABILITY GROWTH POTENTIALS

International Breweries Plc in its audited full year result for 31st March 2017 showed a substantive rise of 40.58% in revenue to N32.71 billion from N23.27 billion in March 2016, while net income on the other hand shows a huge slump of 61.01% to N1.03 billion from N2.65 billion in corresponding year of 2016. The performance of the brewing company can be attributed majorly to growth in cost of funds than in the previous financial period of 2016. A more difficult operating environment due to instability in foreign exchange terrain which impacted foreign exchange investment funds lead to increase in operating expenses and finance cost. Moreover, the importance of the Nigerian beer market cannot be overemphasised in the company’s operations, as sales in Nigeria grew by 40.58%. Furthermore, the Company’s cost of sales grew by 39.70% to N17.55 billion in March 2017 from N12.56 billion in March 2016 due to increase in cost of raw materials, especially sorghum which the company uses in the production of beer and rise in emoluments of production staff. Cost of sales remained stable at 53% as it consumes more than half of the Company’s total revenue. The Company’s gross profit increased by 41.61% to N15.16 billion from N10.71 billion year on year, while its gross profit margin increased to 46.36% as at full year

SIGNIFICANT INCREASE IN FINANCIAL CHARGES AND OPERATING EXPENSES IMPEDES STRONG GROWTH IN NET INCOME

Operationally, International Breweries Plc recorded a significant rise of 57.25% in operating profit to N8.08 billion March 2017 from N5.14 billion in March 2016. The Company was able to grow its operating profit in spite of 41.52% and 3.79% rise in advertisement expenses and administrative expenses respectively. Total operating expenses for the year ended, 31st March, 2017 rose by 27.97% to N7.18 billion from N5.61 billion in March 2016. The Company also recorded a massive drop of 98.67% in finance income to N2.98m in March 2017 from N225m reported in March 2016. It can be assumed that the reduction was due to fall limited or no sale of obsolete assets, which may generate income; and the unfavourable movements in foreign exchange rate. Furthermore, the Company incurred financial charges to N5.20 billion from N1.71 billion year on year, reflecting an extra-ordinary change of 203.95% driven mainly by increased unrealised foreign exchange finance cost. Hence, due to the current challenging operating environment leading to rising inflation, increased cost of financing, higher foreign exchange cost and increasing input cost amongst other, the Company’s pretax earnings decline by 20.92% to N2.89 billion from N3.66 billion during the period under review while its net income declined significantly by 61.01% to N1.03 billion from N2.65 billion year-onyear.

ASSET QUALITY

The Company’s key performance metrics remains strong despite negative change in pr-tax profit and net income margins as reported. Current ratio is positioned at 45.83% as at March 2017 from 51.01% as at March 2016. Return on Average Equity (ROAE) currently stands 7.42% and Return on Average Asset (ROAA) at 2.64%.

GEARED TO BENEFIT FROM THE MERGER WITH CONSOLIDATED BREWERIES

The Nigerian brewing space is currently controlled by two major players accounting for about 90% of the market, while other fringe players control the remaining share. However, the proposed merger of International Breweries Plc, Intafact Beverages Limited and Pabod Breweries Limited is a move to change the customer terrain towards positive market share outcome attributable to International Breweries Plc.

RECOMMENDATION: HOLD

The performance of International Breweries Plc in the full year ended, 31st 2017 was hampered by finance cost compared to the corresponding full year period of 2016. No doubt the Company is structuring its activities to adapt to the current operating challenges and borrowings due for payment within the next two years amounting to N11m. This is in addition to the observed contraction in household consumption expenditure during the first quarter of the 2017 as a result of persistent hike in prices of goods and restrictive economic activities in the country around. Conversely, recent report shows that Africa, especially Nigeria has the fastest growing beer market for the next five years. International Breweries Plc is positioned to benefit from such growth in Nigeria. Thus, there is a positive outlook in top-line and bottom-line earning for the ongoing financial year. Based on historical year-ended financial performance and in conjunction with the findings of our analysis of the current operating landscape, we make a projection for full-year end, March 2018 revenue to N38.31 billion and a net income of N1.11 billion, leading to a forward earning per share of N0.34. Using the PE (Price to Earnings) method of valuation, we arrived at an average 6-month target price of N27.77. Since the target price represents a downside potential of 9.18% on the current stock price of N30.57, we make a HOLD recommendation on International Breweries Plc.

CONVERSELY, RECENT REPORT SHOWS THAT AFRICA, ESPECIALLY NIGERIA HAS THE FASTEST GROWING BEER MARKET FOR THE NEXT FIVE YEARS. INTERNATIONAL BREWERIES PLC IS POSITIONED TO BENEFIT FROM SUCH GROWTH IN NIGERIA. THUS, THERE IS A POSITIVE OUTLOOK IN TOP-LINE AND BOTTOMLINE EARNING FOR THE ONGOING FINANCIAL YEAR