NIGERIAN BREWERIES PLC: Remarkable earnings as operating business environment stabilises
Nigerian Breweries (NB) Plc, the largest brewing company in Nigeria by market capitalization and operational scale, is a renowned name in the consumer goods segment.The brewer has a robust brand portfolio which includes names such as: Maltina, Star Lager Beer, Gulder Lager Beer and Heineken Lager Beer.The company has eight operational breweries across Nigeria, and ultra-modern malting plants in Aba and Kaduna. The company recently released its half-year result for the period ended, June 2017 showing a notable rise in performance as top-line and bottomline increases.
ECONOMIC STABILITY IN THE COUNTRY BOOST NB GROWTH POTENTIALS
The brewing company in its released unaudited half-year result for June 2017 showed a notable growth of 15.02% in revenue to N181.01 billion from N157.37 billion in June 2016, while net income grew by a remarkable figure of 24.57% to N23.75 billion from N19.07 billion in corresponding year of 2016.The performance of the brewing company can be attributed to a better business environment than the parallel period of 2016 which witnessed a more difficult operating environment due to instability caused by the unstable foreign exchange terrain, increased unemployment and fuel scarcity which impacted purchasing power and businesses. Moreover, the importance of the Nigerian beer market cannot be overemphasised in the company’s operations, as sales in Nigeria continue to account for more than 97% of total revenue. Furthermore ,the company’s cost of sales grew by 19.53% to N99.68 billion in June 2017 from N83.39 billion in June 2016 due to increase in cost of raw materials, especially sorghum which the company uses in the production of beer. Cost of sales moved upward to 55% from 51% as it consumes more than half of the company’s total revenue. The company’s gross profit increased by 9.94% to N81.33 billion from N73.98 billion year on year, while its gross profit margin decreased to 44.93% as at half-year 2017 from 47.01% as at half-year 2016.
SIGNIFICANT DECREASE IN FINANCIAL CHARGES STIMULATES GROWTH IN NET INCOME
Operationally, Nigerian Breweries Plc recorded a rise of 15.84% in operating profit to N39.32 billion June 2017 from N33.94 billion in June 2016. The company was able to grow its operating profit in spite of 9.92% rise in total expenses to N39.32 billion from N33.94 billion recorded in June 2016. The reason for the spike in total operating profit was due to enormous growth in other income which grew by 540.31% to N1.82 billion from N283m in the corresponding period of 2016. Costs associated with distribution and marketing expenses rose by 13.31% to N33.40 billion from N29.48 billion in June 2016. Administrative expenses on the other hand grew by 3.81% in halfyear 2017 to N10.44 billion from N10.85 billion year on year. The company recorded a significant drop of 65.54% in finance income to N87m in June 2017 from N252m reported in June 2016. It can be assumed as a result of reduction due to fall in price of or no sale of obsolete assets, which may generate income; and an unfavourable movement in foreign exchange rate. Furthermore, the company incurred financial charges to N5.35 billion from N8.64 billion year on year, reflecting a negative change of 38.16% driven mainly by decreased interest expense on net pension liability despite the current challenging operating environment leading to consumer down-trading, rising inflation, increased cost of financing, higher foreign exchange cost and increasing input cost amongst other.The company was able to grow its pre-tax earnings by a significant 33.31% to N34.06 billion from N25.55 billion during the period under review while its net income grew by 24.57% to N23.75 billion from N19.07 billion year-on-year.
ASSET QUALITY
The company’s key performance metrics remains strong as positive change was witnessed in profit margins as reported. Pre-tax profit margin grew to 18.82% from 16.23%. Current ratio rose to 64.35% as at June 2017 from 51.69% as at December 2016. Return on average equity (ROAE) currently stands 13.81% and return on average asset at 6.28%. The company’s borrowings notably declined to N13.00 billion in June 2017 from N17.00 billion as at December 2016.
GEARED TO BENEFIT FROM INCREASED LOCAL CONTENT
With more raw materials sourced locally by the brewery giant to 99 percent of packaging materials, 100 percent of sorghum and 60 percent cassava starch, the Company has achieved 57% local content therefore positioned to enjoy reduced cost of production. The Nigerian brewing space is controlled by two major players accounting for about 90% of the total market value, while other fringe players control the remaining share. Nigerian Breweries is the biggest player in the sector with a total installed capacity of 15.4mhl. Guinness Nigeria Plc is the second biggest player with 5.5mhl installed brewing capacity. Other players are International Breweries Plc, Champion Breweries Plc and Jos Breweries Plc which among themselves control a limited of market share.
WE PLACE A HOLD RECOMMENDATION IN
view of market share capacity of NB Plc The performance of Nigeria Breweries Plc in the first half-year 2017 was better compared to the corresponding period of 2016 as economy stabilizes. Reports show that Africa, especially Nigeria has the fastest growing beer market for the next five years. Nigeria Breweries is better positioned to benefit from such growth as it controls the largest market share in Nigeria. Thus, there is a positive outlook in top-line and bottomline earning for the current financial year. Based on historical year-ended financial performance and in conjunction with the findings of our analysis of the current operating landscape, we achieve a forward earning per share of N45.54 . Using the PE (Price to Earnings) method of valuation, we arrived at an average 6-month target price of N182.66. Since the target price represents an downside potential of 2.74% on the current stock price of N184.80, we maintain our HOLD recommendation on Nigerian Breweries Plc.
REPORTS SHOW THAT AFRICA, ESPECIALLY NIGERIA HAS THE FASTEST GROWING BEER MARKET FOR THE NEXT FIVE YEARS. NIGERIA BREWERIES IS BETTER POSITIONED TO BENEFIT FROM SUCH GROWTH AS IT CONTROLS THE LARGEST MARKET SHARE IN NIGERIA. THUS, THERE IS A POSITIVE OUTLOOK IN TOP-LINE AND BOTTOMLINE EARNING FOR THE CURRENT FINANCIAL YEAR.