Nigerian Breweries Plc – Increase in revenue and reduction in financial charges improves profitability
The financial performance of Nigeria Breweries Plc for the third quarter 2014 shows an increase in revenue despite a challenging economic and business environment during the period. Nigerian Breweries Plc (Nigerian Breweries) continues its impressive performance and maintains its leadership position in the mainstream lager, premium lager, and malt drinks markets in Nigeria, by way of product turnover and strong market share. Although revenue and profit figures are just moderately ahead of the performance in the corresponding period of the preceding year, the Company continues to retain its dominance as reflected in its 3rd quarter 2014 results. This led the Company’s management to propose an interim dividend of N9.5 billion, which translates to N1.25 per ordinary share of 50 kobo.
STUNTED GROWTH IN REVENUE
For the third quarter period ended September 2014, Nigerian Breweries grew turnover by 2.3% to N194.73 billion from N190.30 billion in the corresponding period of 2013. The growth in turnover was primarily driven by improvements in the supply of products and price increases in stock keeping units. Nigeria is the Company’s primary geographical segment as over 99% of the Company’s sales are made in the country while the balanceis from exports to neighbouring countries. During the period, the Company adopted route-to-market strategies which enhanced its distribution coverage. However, cost of goods sold (COGS) also grew by 1.9% to N99.77 billion in September 2014 from 97.24 billion in September 2013, eroding the gains from turnover increase and resulting in a growth of only 2% in gross profit to N94.96 billion from N92.37 billion over the period. The Company’s management attributed the growth in COGS to high input costs and relatively high excise duties.
DESPITE DECREASE IN FINANCIAL CHARGES, INCREASED TAX EXPENSES IMPEDES STRONGER PROFITABILITY GROWTH
For the nine month period ended September 2014, operating profit grew by 7.3% to N44.81 billion from N41.75 billion in September 2013. This growth was driven by a decrease of 1.0% in distribution, administration and other expenses to N50.14 billion from N50.62 billion over the period. Although other income reduced significantly by 42.3% to N1.18 billion in September 2014 from N2.05 billion in September 2013 as a result of the decline in sales of scrap and contracting brewing services, the Company’s profitability improved due to a substantial reduction in financial charges. Finance costs for the nine month period ended September 2014 declined by 35.2% to N3.42 billion from N5.27 billion in September 2013 despite the tripling of total financial liabilities to N45.06 billion from N15.38 billion over the period. The Company’s pre-tax profit thus grew by 10.5% to N42.58 billion in September 2014 from N38.53 billion in the corresponding period of 2013 while net income grew by 11.3% to N29.82 billion from N26.80 billion over the period. The Company’s return on equity (ROE) therefore grew to 27.56% in September 2014 from 23.85% in September 2013.
MERGER WITH CONSOLIDATED BREWERIES GEARED TOWARDS VALUE CREATION FOR SHAREHOLDERS
If the proposed deal scales through, the decision of Consolidated Breweries Plc to merge with Nigerian Breweries Plc will create sustainable value for both investors and shareholders. In recent years, Nigerian Breweries has made a number of acquisitions including Sona Systems, Life Breweries. The Company is also currently proposing a merger of operations with Consolidated Breweries Plc. The synergies to be created from the merger are expected to appropriate additional value for shareholders. In addition, the merger is expected to also provide a platform where the enlarged company can benefit from economies of scales in procurement, distribution and manufacturing of all the products on offer. It is expected that the benefits from these will accrue to all stakeholders. It will ensure that the quality brands in the portfolio of Consolidated Breweries Plc are marketed and distributed nationwide under the Nigerian Breweries platform; hence creating more value for all stakeholders. According to the merger plan, it is proposed that the assets, liabilities and undertakings of Consolidated Breweries will be transferred to Nigerian Breweries under the terms of the Scheme, in consideration for which new Nigerian Breweries shares will be issued to holders of the Scheme shares. However, shareholders that are not willing to be part of the enlarged company will have the option to receive cash for their shares and make alternative investments as they deem fit. 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. 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 while Consolidated Breweries occupies third position with 3.7mhl. Other players are International Breweries Plc, Champion Breweries Plc and Jos Breweries Plc which among themselves control about 2% of market share. This implies that if the proposed merger between Nigerian Breweries and Consolidated Breweries is approved, the new combined entity will have a wider product portfolio covering all the major beer segments and will give Nigerian Breweries more exposure to the value segment. In terms of market share, FBN Capital estimated Nigerian Breweries market share at around 63% of the market and around 6% to 7% for Consolidated Breweries. Consequently, the combined entity should have a commanding market share of about 70% of the Nigerian beer market.
WE RECOMMEND A BUY
No doubt the year has been a tough and challenging one for most brewing companies as it has been beset by operating challenges such as the continued poor state of transport infrastructure, insecurity, high input costs and unreliable power supply. This harsh environment impacted revenue and earnings negatively for most key players in the sector. Based on historical year-ended financial performance and in conjunction with the findings of our analysis of the current operating landscape, we maintain our earlier full-year ended December 2014 revenue of N289.19 billion and net income amounts of N46.76 billion, as the last quarter of the year is often filed with festivities, leading to a forward earning per share of N6.18. Using the regional (MEA) Industry P/E multiple of 26.28x, Local Peers P/E multiple of 32.83x and Company’s P/E multiple of 24.41x, we arrive at a 3-month weighted stock price of N188.37 per share for the company stock, which represents a 19.87% increment over the current stock price. We therefore recommend a BUY on the shares of Nigerian Breweries Plc.