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Borrowing cost dents International Breweries profit

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The devaluation of the naira has spiked the borrowing cost of International Breweries Nigeria plc (IBN), thus denting the beer maker’s profit, analysis of the financial statement shows.

“The surge in net finance costs was most likely due to the impact of the naira devaluation on IBN’ $25 million loan, although we would be seeking management’s explanation on this point,” said Olajumoke Okeowo, equity research analyst with FBN Capital, in an email note to BusinessDay.

For the nine months ended December 31, 2014, the company’s profit after tax (PAT) reduced by 24.43 percent to N1.45 billion from N1.91 billion the same period of the corresponding year (nine months ended December 2013), while sales increased by 13.02 percent to N15.31 billion.

BusinessDay analysis showed finance costs increase by 64.33 percent to N1.23 billion in the ninemonths to December 2014 from N748.33 million the preceding year.

Additionally, the company has huge debt in the balance-sheet as debt-to-equity ratio moved to 72.06 percent in the review period from 55.41 percent last year, while total debt in the balance-sheet increased by 36.67 percent to N8.41 billion.

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Analysts say the devaluation of naira is soaring material costs of beer makers as these firms import most of the raw materials and input used in the manufacture of alcoholic beverages.

“Firstly, the beer makers and flour millers import more than 50 percent of their raw materials and other inputs, even as other diversified and household/personal product firms such as NESTLE, PZ, UNILEVER, CADBURY, etc, are neither exempted from the impact of the falling naira despite easing commodity prices,” according to Saheed Bashir, an analyst at Meristem Securities, in a response to questions.

The security challenges in the North part of the country combined with infrastructure deficits bedevilling the country are also driving distribution costs of beer makers and IBN is no exception.

Consequently, IBN’s operating expenses were up by 26.40 percent to N4.46 billion compared with N3.52 billion the preceding year. Cost of sales increased by 17.05 percent in the review period to N7.50 billion as against N6.41 billion last year.

Net margin, a measure of profitability and efficiency, reduced to 9.40 percent from N14.15 percent, while operating expense moved to 29.52 percent compared with 25.97 percent last year.

Nigeria, Africa’s largest economy, has some potential for growth waiting to be unlocked by beer makers. These opportunities include: a large market, youthful population that crave for consumption and rising middle-class with disposable income.

According to Deutsche Bank Market Research, Nigeria is Africa’s largest alcohol consumer, which places beer makers in an upside position.

IBN’s total assets were up by 18.06 percent to N28.50 billion as against N24.14 billion last year.

The company’s share price closed at N19.41 billon on the NSE, while market capitalisation was N63.25 billion.