Nigerian Breweries: Still on the third consecutive quarter of losses

When Nigerian Breweries Plc released its unaudited results for the first quarter (Q1) ended March 31, 2023, not a few market watchers observed its record negatives across top-to-bottom line figures.

The largest brewer in Nigeria reported Q1’23 revenue of N123.314billion, from N137.772billion reported in first quarter of 2022, representing a decline of 10.5percent. Its Gross Profit printed lower at N43.884billion, from N62.453billion in Q1’22, down by 29.7percent.

The company’s marketing and distribution expenses went up to N33.697billion in Q1’23 from N32.588billion in Q1’22, up by 3.4percent, while administrative expenses rose by 10.3percent, to N8.218billion in Q1’23, from N7.452billion in Q1’22.

Nigeria Breweries opened this week’s trading with share price at N41. The stock which had reached a 52-week high of N50.8 and a 52-week low of N28.8, traded higher by 1.83percent at N41.75 as at close of trading on Tuesday, June 6.
According to Chinma Ukadike, equity research analyst at Lagos-based Vetiva, their target price for Nigerian Breweries is N25.42 with SELL rating.

Also, in their June 5 weekly stock recommendation, Meristem research analysts said their target price for Nigerian Breweries share is N31.95 and they also rate the share HOLD. Though, United Capital research analysts said their full year target price for Nigerian Breweries is N60, with a BUY rating.

“Speaking specifically to topline, the crunch in volumes from a combination of lower purchasing power and increasing retail prices is beginning to take shape and currently reflects in the 10percent year-on-year (y/y) decline in revenue to N123.3 billion for the quarter. To buttress this point, we look at inventory levels, which have increased by 53percent over the last one year and have surpassed the 5-year average inventory holding days,” Ukadike said in an April 28 note to investors justifying their SELL rating for the stock.

“We believe that underlying this volume challenge is the company’s (and an industry-wide) decision to take a series of pricing increases over the last couple of quarters. Meanwhile, we do not rule out the impact of the cash crunch that prevailed in the middle of the quarter but ascribe some of the quarter-on-quarter (q/q) growth in receivables to this. Nonetheless, given this event, we expect the company to dial-back on pricing increases so as to minimise the fall-out on demand volumes.

“That being said, we do not expect a significant withdrawal, given their own challenges on the input and operational cost fronts. Summarily, we revise our full year revenue expectation downwards to N561.7 billion, reflecting severely impacted volume numbers and an expectation of a slight back-track in pricing,” the Vetiva analyst added.

The parent company, Heineken maintains a 52percent controlling stake in the larger entity. Nigerian Breweries has 8.221billion shares outstanding. The brewer dominates Nigeria’s brewery market with about 60percent market share and a brand portfolio that includes lager beer, stout beer, non-alcoholic malt drinks, carbonated soft drinks and ready-to-drink brand.

Nigeria Breweries Net Finance costs increased by 552.5percent to N19.321billion in Q1’23, from N2.961billion in Q1’22. It reported Loss Before Tax (LBT) of N17.437billion in Q1’23 as against Profit Before Tax (PBT) of N20.763billion in Q1’22, representing a dip by 184percent. Also, its Loss After Tax (LAT) of N10.715billion in Q1’23 as against Profit After Tax (PAT) of N13.614billion in Q1’22 represents a decline by 178.7percent.

Read also: Comercio Partners tasks new administration on policy reforms, improved governance

“Nigerian Breweries’ bottom-line performance was quite underwhelming, moving from a profit position of N13.6 billion in Q1’22 to a loss of N10.7 billion in Q1’23 and this makes it the third consecutive quarter of losses. While the Revenue downgrade was a notable factor in this performance, the main culprit was a N14.6 billion foreign exchange loss in the quarter. For context, loss on foreign transactions only amounted to N1.9 billion in the corresponding quarter of the preceding year and when we strip out the FX-related costs, the company was set for a decent performance, propped up by pricing and suitable margins. Regardless, the company’s FX position is still a cause for concern.

“Meanwhile, interest expense was an additional pressure point in this quarter, increasing 4x to N4.7 billion, based on a 59percent increase in loans and borrowings quarter to date. According to management, Nigerian Breweries plans to seek shareholder approval for a $121 million loan from parent company, Heineken, preferring milder terms from in-house sourcing amid the prevailing high interest rate environment. With this arrangement, the company could be able to refinance existing debt obligations and manage interest expense; however, this does not cut out FX translational risks.

“Overall, we expect the company’s bottom-line to shrink to N1.3 billion from N13.2 billion in full year 2022. Based on these projections, we arrive at a one-year target price of N25.42 per share (-23percent relative to current market valuation) and rate the stock a SELL”.

The Nigerian Breweries N16.49 billion Series 1, N5.03 billion Series 2, and N45.74 billion Series 3 CPs under its N100 billion CP Programme was admitted on the Exchange’s platform on January 30, 2023. Through the registration of this CP Programme, which is sponsored by Stanbic IBTC Capital Limited (the Lead Sponsor), FCMB Capital Markets Limited and FBNQuest Merchant Bank Limited, all Registration Member (Quotations) of the Exchange, the Issuer is availed the opportunity to raise short-term finance from the Nigerian debt markets at a time it deems suitable, through CP issuances, within the CP Programme limit.

Speaking further on the Q1’23 scorecard, the Vetiva analyst said, “With inflation expected to remain a pressure point, input costs would remain elevated and impact gross margin. More so, with the expectation of a subsidy removal, operational expenses are likely to rise as well. Added to this, if our expectations of a pricing withdrawal strategy holds, margins may consequently come in weaker. That being said, the company’s commitment to transition to solar-powered energy sources should impact operating expenses positively and by extension margins in the long term”.

Shareholders of the Nigeria’s foremost brewing company had at the 77th Annual General Meeting of the company in April unanimously approved the dividend payout of N13.87 billion for the 2022 financial year. The shareholders equally authorised an intercompany loan of 110 million euros from Heineken International, which is meant to settle foreign currency-denominated payment obligations of the company. Each shareholder of Nigerian Breweries received a final dividend of N1.03 having earlier received an interim dividend of 40kobo that was approved in October 2022.

Recently, Nigerian Breweries said it has concluded plans to acquire 80percent stake in Distell Wines and Spirits Nigeria Limited as part of efforts to capture significant growth opportunities in the wines and spirits segment of the brewing industry. The Brewer in a notification of proposal sent to Nigeria Exchange Limited said it received the offer from Heineken Beverages (Holdings) Limited to buy or acquire 80percent majority interests in Distell Wines & Spirits Nigeria Limited (Distell Nigeria). “The Board resolved to consider the offer in detail with support from external legal and financial advisers and thereafter make a decision thereon in the coming weeks. The outcome of the decision will be communicated in due course,” the company noted. This acquisition is expected to further strengthen the company’s leadership position in the brewing segment of the Nigerian manufacturing sector.