Currency volatility leads to lower Nigeria Breweries earnings

A weaker naira has spiked the cost of production of Nigeria Breweries Plc, the local unit of Heineken, leading to lower earnings amid a slowing economic growth in Africa’s most populous country.

For the year ended December 2015, Nigeria Breweries’ reported group profit before tax (PBT) of N54.51 billion versus N61.46 billion last year.

Revenues however increased to N293.91 billion versus 266.37 billion naira last year as contributions from new products such as Ace roots and inorganic growth strategy bolstered the top line.

A 15.80 percent increase in cost of sales to N151.44 billion prevented the impressive growth at the top line from trickling down to the bottom line.

Cost of sales margin however remained flattish at 51 percent. This means the brewer spent N51 on every N100 it generates in sales.

“Devaluation has a negative impact on their business,” said Tajudeen Ibrahim, head – equity research at Chapel Hill Denham, in a telephone interview.

“It is on their cost of sales level the thing affected them. FX commodities are lower at the international market coming with huge volatility in exchange rate.  Devaluation affected lower pricing of raw materials,” said Ibrahim.

The central bank of Africa’s most populous nation devalued the currency in 2014 to N199 from N155 per dollar in order to stabilize its reserves that were being hard hit by the continued plunge in oil prices.

Analysts say since 55 percent of material components used in the manufacture of beer are imported, another round of devaluation could expose these firms to currency risk hence spiralling cost of production.

Despite the aforementioned rising costs, Nigeria Breweries was effective in managing direct costs attributable to products as gross profit increased by 5.06 percent to N142.046 billion in 2015 as against N135.59 billion in 2014.

Gross profit margins however fell to 48.48 percent in 2015 as against 50.05 percent in 2014.

“NB’s 2015 PBT of N54.5bn came in behind consensus 2015 PBT forecast of N59.8bn,” said Tunde Abidoye equity research analyst with First Bank Capital in a February 10 note.

“As such, we expect to see downward revisions to consensus 2016 PBT forecast. NB shares have underperformed the index ytd. They are down by -25.1. % ytd compared with the -14.6% ytd return delivered by the index. We expect to see a mild sell-off in the shares,” said Abidoye.

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, data from the Nigerian Bureau of Statistics (NBS) show. 

“Nonetheless, we think the company’s wide product portfolio will enable it compete favorably, particularly within the value beer segment, which has continued to outpace the mainstream and premium brand segments,” said Ibrahim.

 

BALA AUGIE