• Thursday, December 07, 2023
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Beer makers’ retained earnings plunge, threatens dividend payments

Beer makers’ retained earnings plunge, threatens dividend payments

Beer makers have recorded significant retained earnings plunger in the first nine months of 2023, a development that is posing threats to their ability to pay dividends for the 2023 financial year.

Four beer makers listed on the Nigeria Exchange, namely International Brewery, Nigeria Breweries, Champions Brew, and Guinness Nigeria Plc, collectively incurred retained losses amounting to N53.39 billion.

This is a shift from the N102.82 billion in retained earnings recorded during the same period in 2022.

“The overriding concern that has triggered a situation where businesses have negative retained earnings in the breweries sector can be largely traced to the recent Naira devaluation which has significantly impaired value for businesses with huge dollar exposures amid the protracted decline in purchasing power in the Nigerian economy,” Ayodeji Ajilore, an investment research analyst with ARM said.

Retained earnings are the net income left over for the business after it has paid out dividends to its shareholders, which is an equity account.

Negative retained earnings often serve as indicators of prolonged financial losses, potentially foreshadowing bankruptcy. Such circumstances may also imply that the company disseminated borrowed funds to shareholders in the form of dividends.

Nosike Nwajide, team lead, research, Agusto & Co. noted that the weaker exchange rate has also driven up the costs associated with servicing foreign debt obligations, putting a further strain on profit margins.

The beer maker cumulatively reported losses after tax in the period under review. This loss amounted to N96.69 billion, contrasting with the profit after tax of N16.42 billion recorded during the same period in 2022.

Read also: Three takeaways from beer makers’ performance in Q1

These losses can be traced back to the unification of the foreign exchange by President Tinubu in the first half of 2023 and the consistent increases in interest rates by the Central Bank, aimed at curbing inflation.

“The shift to a floating exchange rate triggered a steep depreciation of the naira and culminated in major FX losses,” Nwajide said.

Throughout the year, Nigeria’s economy has faced multiple challenges, including a cash crunch in the first quarter, uncertainties related to the presidential election, inflation concerns, heightened interest rates by the Central Bank to combat inflation, rising input costs, and foreign exchange losses due to the unification of foreign exchange markets.

Nwajide noted that the implication of retained losses could limit the financial flexibility of the brewer, which could constrain their ability to embark on new projects or expand their operations.

“Negative earnings could therefore make a brewer seem less attractive to investors, who may view the company as having a weaker financial position and less growth potential.

“It could lead to potential credit rating downgrades, making it challenging to secure loans and funding for business operations, and would also reduce the ability to engage in share buybacks,” he said.

Nwajide noted that some brewers passed on some of the costs to the consumers in the form of higher prices, but the weaker purchasing power of the average Nigerian consumer resulted in less beverage consumption.

Revenue of the beer makers in the review period grew by 6.1 percent to N653.37 billion, primarily attributed to price increases.

“While FX illiquidity remains a challenge, efforts by the CBN to clear the FX backlog could provide respite much sooner than anticipated. A $10 billion inflow would ease currency pressures in the near term, and lower the premium at the parallel market. Crucially, it would ease FX constraints at the official window and could allow brewers to obtain most of the FX at the official price,” Nwajide said.

Read also: Q1 2022: Nigerians consuming more alcohol help beer makers record profit growth

Firms Analysis

International Brewery

International Brewery, a subsidiary of the AB InBev Group, the world’s largest brewing company, recorded an increase in its retained loss during the first nine months of 2023.

This increase amounted to 119.9 percent, totalling N86.86 billion, compared to a retained loss of N39.49 billion reported during the same period in 2022.

The retained losses signify that the company recorded a loss after tax. Loss after tax in the first nine months of 2023 grew by 917.7 percent, reaching N28.6 billion, a stark contrast to the N2.81 billion loss reported in the same period in 2022.

The company’s loss after tax for the nine months can be attributed to the rising finance costs it incurred.

The interest expenses on its borrowings surged by 244 percent year-on-year when compared to the corresponding period in 2022.

Challenges stemming from the heightened macroeconomic conditions and inflation caused the company’s input costs to consume 79 percent of its revenue during the period under review.

Despite this, the company managed to achieve a 14.6 percent growth in revenue, reaching N183.8 billion, up from N160.4 billion in 2022.

The company also reported a loss in its earnings per share, with it dropping to N1.06 from a loss of N0.10 recorded during the same period in 2022.

Read also: Nigeria beer makers post least boozy result in 6yrs

Nigeria Breweries

Nigerian Breweries, the local subsidiary of Heineken NV, the world’s second-largest brewing company, recorded a 75.9 percent reduction in its retained earnings, which dwindled to N22.9 billion during the period being examined, down from N95.6 billion reported in the same period of 2022.

This decline can be directly attributed to the loss after tax incurred during the review period, which amounted to N56.8 billion, marking a contrast to the profit after tax of N15.25 billion recorded in the same period of 2022.

The net loss on foreign exchange transactions surged by 737.9 percent, reaching N86.83 billion in the nine-month period of 2023, compared to N10.36 billion in 2022.

“Finance Cost jumped by 205.1% to N18.89bn (9M 2023) from N6.2bn (9M 2022) which we believe is due to high-interest rate on ballooned long-term loans & borrowings which shot up by 82.38% to N72.15bn (9M 2023) from N39.56bn (9M 2022),” CSL said in a note.

Despite the challenges, revenue showed a slight increase of 2.3 percent, reaching N402 billion during the period under review, up from N393 billion in the same period of 2022. This increase in revenue can be attributed to higher prices.

Uaboi Agbebaku, the Company Secretary/Legal Director, in a statement, stated that the increase in revenue was recorded despite a decline in sales volume caused by the continuing pressure on disposable income and the socio-political challenges in various parts of the country.

Agbebaku also pointed out that the lower sales volume, increased input costs due to high inflation rates and Naira devaluation, along with a one-time restructuring cost.

This, in turn, led to input costs consuming 62 percent of the revenue, amounting to N249 billion in the period under review.

The company also reported a decrease in earnings per share during the review period, with it dropping to a loss of N685 from N189 reported in the same period of 2022.

Guinness Nigeria Plc

Guinness Nigeria Plc, one of the top brewers in Nigeria and a subsidiary of Diageo Plc recorded a 76.4 percent decline in its retained earnings.

For the fiscal year 2024, retained earnings amounted to N10.48 billion, a decline from the N44.4 billion reported in the same period of 2022.

The company also saw a slight decrease in its profit, with a marginal decline of 5.8 percent, resulting in a profit of N2.59 billion, compared to N2.75 billion in the same period of 2022.

Revenue amounted to N59.53 billion from N52.85 billion recorded in the same period of 2022.

“Revenue grew by 12.7 percent y/y in Q1-24 (Q1-23: +11.3 percent y/y), supported by (1) pricing adjustments, (2) optimized product mix led by premiumization, and (3) improved distribution method,” Cordros Securities said in a note.

Delving into the financial details, the net finance costs surged by 117.8 percent to N4.06 billion in the quarter, primarily due to an 87.8 percent increase in finance costs. This increase was associated with a rise in accrued interest expenses by 351.8 percent and foreign exchange losses by 156.6 percent.

Earnings per share also witnessed a decline, falling to N119 in the period under review, compared to N125 recorded in the same period of 2022.

Champion Brew

Champion Brew, on the other hand, reported a slight uptick in its retained earnings for the first nine months of 2023, rising to N2.91 billion from the N2.34 billion recorded during the same period in 2022.

However, the company did incur a loss after tax amounting to N77.69 million, a contrast to the N1.26 billion profit recorded in the same period of 2022.

In terms of revenue, there was a decrease of 6.7 percent, with revenue amounting to N8.36 billion in the first nine months of 2023, compared to N8.96 billion recorded in the same period of 2022.

Earnings per share recorded a loss of N0.99 in the period under review, down from N16.09 recorded in the same period of 2022.