Is Interbrew’s quest to win the “beer war” a drag on profitability?

AB Inbev-owned International Breweries, Nigeria’s third-largest listed beer maker, might be gaining market share but the brewery’s loss is worsening.

Interbrew on Wednesday reported a loss of N6.84 billion for six months to June 30, 2019, some140 percent worse than a year ago when it reported a loss of N2.85 billion. This is in spite of improved sales supported by volumes from its recently opened $250mn Sagamu brewery plant.

Amidst an on-going beer war and increasing cost in the tariff-burdened beer sector, Interbrew has employed debt to finance growth and strengthened advertising campaign to lure more price-sensitive local beer consumers.

“To gain more market share Interbrew didn’t fully pass on its increasing cost to consumers,” said Fola Abimbola, equity analyst at Lagos-based Fbnquest.

“Interbrew has always said its priority for now is gaining market share, they are more long-term,” he said.

Analysts believe the beer maker needs to restructure and inject more capital to dilute its high debt to equity ratio which is around 7x, and much higher than the leverage ratio of peers.

Earlier in the year, the Interbrew reversed a hike to its premium brand dubbed “King of beer” but retraced its steps after rival beer manufacturers

did not follow suit.

Nigerian Breweries’ Heineken and Diageo’s Guinness Gold were the biggest winners in the price change.

Interbrew,the maker of Budweiser, Trophy, Hero, and Castle larger, also noted a higher impairment loss on financial assets and an increase in administrative expense in the period as cost inefficiencies beset performance.

Analysts at Lagos-based CSL Stockbroker recommend a “SELL” on Interbrew stock.

Interbrew grew sales to N68.63 billion, up by 29 percent from N53.11 billion yearon-year in H1, while the cost of sales increased by 41 percent to N41.12 billion. The company’s sale was faster than rivals in Q1, while Nigerian Breweries’ H1 sales slowed year-on-year.

Gross profit grew 10.91 percent although the gross margin was squeezed, resulting in Interbrew retaining N33.79 per N100 sales net of direct production cost, down from N39.37 in the same period of 2018.

In the period, Interbrew made less money from the sale of scrap but the decline was compensated by a much higher increase in sundry income noted in Q2 2019.

The company nearly tripled sundry income from previously recorded N13.76 million last year, this buoyed income from other sources.

A net impairment loss on the company’s financial assets in the second quarter of 2019 was 178.6 percent more than N236 million recorded last year. Impairment occurs when business asset’s fair market value decreases more than its book value. The asset is re-valued and a charge made to net assets.

The company’s marketing and promotion activities whilst translating to increased patronage of Interbrew products in a fiercely competitive beer industry resulted in a 30.5 percent spike in expenses to N13.5 billion.

Transportation and distribution cost jumped 43.2 percent to N6.62 billion, employee benefit expense rose 48.3 percent to N2.33 billion while advertising and promotion rose 9.7 percent to N4.57 billion.

The company’s administration expenses also jumped 66.52 percent to make little of an improvement in other gains of the brewery firm. This performance resulted in an operating loss for Interbrew.

While finance income declined significantly borrowing cost rose to N7billion, 13.5 percent increase in the review period. The burden of its debt weighed on profit as the brewery did not deleverage in the half-year.

As a result loss before tax doubled in the period while a deferred tax cushioned the effect on net income. Earnings per share dropped to a negative of 80kobo from a loss of 33kobo last year.

Shares of Interbrew remained flat at N12.5 per share on Wednesday.