International Breweries profit falls on rising finance and Opex costs

International Breweries Plc have had rising finance costs and spiraling operating expenses weigh on profitability as the devaluation of the naira makes it difficult for the company to take advantage of price fall in raw materials.

For the six months ended 30th September 2015, International Breweries Plc net income dropped by 48.18 percent to N704.81 million as against N1.36 billion the previous year. Sales reduced increased by a mere 0.7 percent to N10.14 billion as the company like other brewers struggle with weak consumer spending stoked by slow economic growth.

Analysis of the financial statement of International Breweries Plc shows the drop in profit was caused by a reduction in Operating expenses by 16.66 percent to N3.28 billion in 2015 as against N2.81 billion last year.

Also, top line also took a hit from a 156 percent jump in finance costs to N790.81 million in the period under review from N308.91 million in 2014.
“International Breweries’ Q2 results were weighed down mainly by gross margin contractions and elevated finance costs,’’ said Jumoke Okeowo, equity research analyst with FBN Capital in an emailed note to BusinessDay.

‘’Given the challenges in sourcing fx, we do not see gross margins showing any meaningful improvement in the near term unless raw material prices decline enough to offset fx losses. The company’s cost of debt increased by 800bps last quarter, said Okeowo.

Analysts say the devaluation of the naira by the Central bank has increased the cost of raw materials of brewers in Africa largest economy as most firms import between 55 percent and 60 percent of raw materials to meet production.

As a result of the devaluation, International Breweries Plc gross margins contracted to 50.09 percent in 2015 as against 51.98 percent last year. Gross profit fell by 4.57 percent to N5.08 billion which means the company is not efficient in managing direct costs attributable to profits.

Recent numbers released by brewers in such as Nigeria Breweries and Guinness showed top lines were dampened by economic doldrums caused by rising inflation that eroded discretionary income.

Nigeria inflation increased advanced to 9.4 percent in November after a brief respite in previous month on the account of increased costs. This transportation costs have taken most of consumer spending leaving little income to be spent on alcoholic beverages.

Economic growth rate slowed to 2.4 percent Q2 of 2015, with a marginal increase to 2.84 percent in Q3 of 2015 compared to nearly 4.0 percent in the first quarter of 2015, and 6.2 percent in the fourth quarter of 2014, according the NBS data.

International Breweries Plc total assets increased by 14.45 percent to N31.76 billion in 2015 compared with N27.75 billion in 2014. The drop in profit impacted on Return on equity (ROE) which moved to 5.47 percent in the period under review as against 11.74 percent last year.

The company’s share price closed at N16 on the floor of the exchange while market capitalization was N52.70 billion.

“As such, we expect finance costs to remain elevated. Consequently, we have modeled a -6.4% y/y decline in PAT in 2016E,’’ said Okeowo.