Borrowing costs, rising Opex pressures International Breweries profit growth

International Breweries Plc, owned by SAB Miller, the world’s second largest brewer, had profit crimped by huge finance costs and rising operating expenses as lower oil prices dent consumption in Africa’s largest economy.

For the twelve months year ended 31 March 2015, International Breweries net income fell by 7.55 percent to N1.96 billion from N2.10 billion the previous year.

Sales increased by increased by 11.65 percent to N20.65 billion as the company concentration of brands in the value segment of the market contributes significantly to top line.

The spiraling interest expense in the books of International Breweries exposes it to financial risks as there are possibilities that shareholders will lose money when the company’s cash flows proves inadequate to meet its financial obligation.

Shareholders will demand much a higher rate of returns for investing in a high risk company like International Breweries as its debt to equity (D/E) ratio increased to 80 percent in 2015 as against 41.0 percent in 2014.

A high D/E ratio means the company uses 80 percent of lender’s money to finance its growth expansion.

The company’s finance costs increased by 61.50 percent to N1.82 billion while operating expenses jumped by 18.23 percent to N4.61 billion.

Analysts say hard times lies ahead for International Breweries as beer volume growth are expected to decelerate on the back of lower oil price and the fuel scarcity that constrained consumer wallets.

Oil prices have fallen by 50 percent in the past six months making the Central Bank Nigeria devalue the naira in order to protect the depleting external reserve.

The devaluation of the currency exposes International Breweries to currency risk as dollar denominated in the company’s balance sheet may spike.

Inflation increased to 8.7 percent in April, close to the top of the bank’s 6 percent to 9 percent target band.

The naira has lost more than 13 percent of its value against the dollar in the past six months, and was trading 0.2 percent stronger at 199 a dollar by 3:47 p.m. in Lagos.

Nigeria, Africa’s largest economy and oil producer, is the continent’s second-largest beer market after South Africa, growing at an annual volume of 6 percent, according to SABMiller.

International Breweries cost of sales increased by 20.85 percent to N20.65 billion while cost of sales margin increased to 56.07 percent in 2015 compared with 51.83 percent as energy cuts and rising production costs dampens profit.

Operating profit margins were down to 22.42 percent in 2015 from 27.30 percent in 20014. Net margin a measure of profitability and efficiency dropped to 9.34 percent in 2015 as against 11.35 percent.

International Breweries total assets moved by 23.80 percent to N30.71 billion in 2015 as against N24.37 billion in 2014.

The company’s share price closed at N20.01 percent while market capitalization was N68.48 billion.

 

BALA AUGIE