Cheaper brands, margin expansion bolster International Breweries performance

International Breweries Plc’s approach of going down the price ladder has widened its sales base, an impressive result that trickled down to the bottom lines as the Nigerian brewer recorded gross margin expansion and increased profit.

For the first nine months ended December 2015, International Breweries’ net income increased by 18 percent to N1.71 billion from N1.45 billion the previous year.

Sales jumped by 7.96 percent to N16.46 billion as the company continues to introduce new products with a view to increasing its share of the Nigeria market.

‘‘International Breweries’ Q3 results were mainly boosted by increased sales and gross margin expansion,’’ said Jumoke Okeowo, equity research analyst with First Bank Capital, in an emailed note to BusinessDay.

‘‘We believe that the sales increase was driven by volume growth rather than pricing as manufacturers are currently finding it difficult to pass on cost increases to consumers,’’ said Okeowo.

Analysts attribute the growth at the top and bottom line amid pressured consumer wallets to the introduction of low cost products like “Hero” into the market by parent company SAB MILLER.

Analysts say Hero beer is 40 percent cheaper than rival lagers.

While the second biggest brewer in Nigeria, Diageo Plc’s Guinness Nigeria Plc, have experienced slower growth because of stiff competition, higher fuel prices and depressed consumer income as shown in its latest earnings posted on the website of the NSE, International Breweries’ net margins, a measure of profitability and efficiency, increased to 10 percent in 2015 from 9 percent in 2014.

International Brewery was efficient in managing direct costs attributable to projects as gross profit rose by 10.55 percent to N8.29 billion in 2015 as against 7.50 billion in 2014.

Gross profit margin moved to 50.36 percent in 2015 from 48.87 percent the previous period. Return on equity (ROE) rose to 13.10 percent in 2015 from 12.10 percent the previous year. Return on assets (ROA) jumped to 5.31 percent in 2015 from 5.0 percent in 2014.

International Breweries profits in the period under review can also be attributed to its efficient cost control mechanism that has yielded fruit as operating expenses were down by 16.39 percent to N4.84 billion.

The company’s Cost of sales increased by 4.56 percent in the period under review compared with N7.81 billion in 2014. Cost of sales margin reduced to 49.57 percent in 2015 from 51.16 percent as the company continues to spend less on input costs in producing each unit of products.

Analysts say International Breweries may find it hard to maintain such high margins due to the foreign exchange restrictions, rising inflation and the devaluation of the currency.

In order to curb inflation and protect the economy from continued drop in oil price, the central bank imposed FX trading restrictions and banned importers from using the foreign-exchange market for about 40 items.

The edicts have made it difficult for Brewers in Africa largest economy to import raw materials and obtain dollars needed to operate in a tough and unpredictable environment.

Nigeria’s consumer price inflation stood at 9.6 percent year-on-year in December, up 0.2 percentage points from November, and still above the central bank’s target upper limit of nine percent, the national bureau of statistics said in January.

Nigeria’s economic growth slowed to 2.84 percent in the third quarter of 2015 from 6.23 percent a year earlier as a result of lower oil prices, the Nigerian Bureau of Statistics.

‘‘Given that FX pressures persist, we have been conservative in our forecasts because we do not see continued gross margin expansion. In the near term, we see sales and EPS growth of 6% y/y and 9% y/y on average respectively over the 2016-17E period,’’ said Okeowo.

International Breweries Plc share price closed at N21.47 on the floor of the exchange while market capitalization stood at N67.36 billion.

BALA AUGIE