New Telegraph

International Breweries: Operational challenges hit earnings

The shift in consumer patterns in the light of the economic situation in the country and corresponding squeeze on disposal income is taking a toll on the earnings of International Breweries Plc. CHRIS UGWU writes

 

 

As Nigeria suffers from volatility in crude prices and COVID-19 crisis, with government revenue declining and public sector workers, consumers of brewery products are increasingly trading down to more affordable brands due to the economic down turn.

Following the challenging macro-environment and the squeeze on household wallets, growth in the mainstream segment has been constrained, with more growth seen among cheaper brands.

Notable among the changes to the architecture of alcohol business in the country is the rising to prominence of a new variant of alcoholic drinks, which mixes bitters with spirit.

For instance, the introduction of bitters beverage led the change in market share of all other alcoholic brands and making them suffer a significant loss in market share.

To this end, the audited results of some of the companies in the sector have not been encouraging and the expectations were that the subsequent results will be brighter enough to erase the negatives in the accounts but unfortunately the trend has continued unabated.

International Breweries Plc like its peers has not been unable to sustain its performance despite innovative and proactive responses to market dynamics and competitive pressures.

Market watchers attributed the depletion in revenue to stiff competition and drop in the value of naira despite its innovation in the industry.

The company’s share price movement stood at N7.00 per share when the closing bell rang on Friday.
Company’s Profile
International Breweries Plc was incorporated in December 1971 by its founder and first Chairman, Dr. Lawrence Omole under the name International Breweries Limited. The Company commenced production of its flagship product Trophy Lager in December 1978 with an installed capacity of 200,000 hectoliters per annum.
Following the increasing demand for its products, in December 1982 the Company embarked on an expansion programme to increase its capacity to 500,000 hectoliters annually.

The company was listed on the floor of the Nigerian Stock Exchange (NSE) in April 1995. In 2008 a turnaround strategy was implemented and the company successfully raised funds from the Nigerian capital market with the issuance of 1.6 million ordinary shares of 50 Kobo each at 87kobo per share.

This funding started the resurgence of the organization and its  brands. In 2008 the Warsteiner Group sold its majority shareholding to the Castel Group and in January 2012 SABMiller Plc entered into a strategic alliance with the Castel.

During this period, significant investment was made, which transformed the company and provided it with a solid foundation for growth and profitability.

 

In 2017, the board through a scheme of merger sanctioned by the Federal High Court, merged with Intafact Beverages Limited and Pabod Breweries Limited (companies with similar objects) in other to provide for the optimisation of efficiencies, leverage on economies of scale ensure shareholder value creation amongst others.

Financials

International Breweries (IB) Plc released its unaudited financial statement for the Q4 period ended December 2019. The result showed an unimpressive performance.

During the period under review, the brewer’s revenue dropped by 5.8 per cent to N35.09 billion, down from N37.3 billion in Q4’18.

On the other hand, administrative and marketing expenses both increased to N8.3 billion and N6.039 billion, indicating some 125.4 per cent increase and a 43.7 per cent increase, respectively.

The company then reported a loss before tax of N13.4 billion as well as a loss after tax of N9.1 billion as against profit before tax of N1.140 billion and profit after tax of N3.271 billion posted in 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales stood at stood at N23.215 billion from N21.905 billion in 2018.
IB began the year on unimpressive note as its Q1 2020 Unaudited results for the period ended March 31, 2020 showed Revenue grew by 0.72 per cent to N35.3 billion from N35.1 billion in the previous quarter.

The company’s loss before tax stood at N7.7 billion as against N5.318 billion in 2019 while its loss after tax stood at N5.6 billion from N3.988 billion a year earlier.

 

International Breweries’ (IB) Q2 2020 results revealed that volumes declined by double-digits y/y, largely because of the lockdown during the quarter.

 

According analysts at FBNQuest, this marks the biggest volume loss since the company’s merger in 2017. Pretax loss improved by 18 per cent y/y on the back of a 19 per cent y/y decline in opex and a 6x y/y increase in other income. Indeed, amid the lockdown, IB cut spending on promotional activities by half; this drove the opex decline.

“Also, gains from derivative and sundry income booked for the quarter boosted other income. Looking beyond Q2, we continue to see sustained pressure on volumes because of subdued demand. We also expect competitive and fx headwinds, and the likely non-recurrence of other income to squeeze earnings. We have made modest cuts to our sales and gross margin forecasts in response to -9 per cent and -57bps negative surprises respectively in H1.

 

“Nevertheless, the cuts for 2020E are offset by favourable adjustments to opex and other income. As such, our 2020E pretax loss forecast is now 35 per cent lower. We however model  WATCHan average increase of 6% in our 2021-22E pretax loss forecasts, largely driven by marked cuts to our interest income estimates considering the lower yield environment.

 

“Essentially, we forecast an average decrease of eight per cent to pre-tax losses for 2020-22E. Our new price target of N6.9 is 15 per cent higher because we rolled over our valuation to 2021. Year-to-date, IB shares have sold off by -65 pnter c, underperforming the broad market by -57 per cent. Our new price target implies an upside potential of 109 per cent.

 

“Despite the considerable upside, we retain our underperform rating for the following reasons: i) the market continues to discount the valuation argument, and ii) we see bearish sentiments persisting given negative earnings over forecast years,” the analysts said.

 

Q2 sales declined by -25 per cent y/y to N25.3 billion while gross margin contracted by -380bps to 13.3 per cent. These negatives were however offset by the favourable y/y changes in opex and other income. These supported the 18 per cent y/y reduction in Q2 pretax loss.

 

On a sequential basis, sales and gross margin fell by -29 per cent q/q and -414bps q/q respectively. Pretax loss was, however, better by 44 per cent q/q as a result of a 13 per cent q/q decline in opex, and other income of N1.1 billion versus a -N5.6 loss in Q1. Relative to our forecasts, gross margin was -168bps narrower. Opex however surprised positively by 15 per cent, while other income compares to our loss forecast of -N5.8 billion. These positive surprises led to a 56 per cent lower-than-forecast pretax loss for Q2.

 

Third quarter 2020 unaudited results for the period ended September 30, 2020 showed that revenue declined by -1.5 per cent to N96 billion from N97 billion in the previous quarter.

 

Loss before tax stood at N17.7 billion in third quarter as against a loss of N24.077 billion in 2019

 

Loss after tax stood at N10.9bn from loss of N16.445 billion in 2019 while net assets grew by 1909.9 per cent from N7.5bn to N150 billion.

 

Looking ahead

 

International Breweries had last year announced the completion of  the N164.4 billion rights issue, following receipt of the Securities & Exchange and Commission’s approval of the basis of allotment. The offer was 100 per cent subscribed.

 

The net proceeds will be used to reduce the Company’s leverage, thereby setting the Company on the path to profitability post the landmark construction of the Gateway plant (the second largest Brewery plant in Africa) costing over $250 million.

Commenting on the rights issue, a senior executive of International Breweries Plc, said: “Through the Rights Issue, the company’s capital structure is expected to change remarkably as long-term debt is being replaced with equity, thereby easing the burden of interest payments, increasing management’s flexibility to take advantage of growth opportunities as well as eliminating volatility in earnings.”

Kemi Awodein, Managing Director, Chapel Hill Denham Advisory Limited, added: “We are honoured to have led this landmark transaction, which is Nigeria’s largest rights issue. We believe that the company is now better positioned for accelerated growth post this rights issue. The rights issue demonstrates our belief in the company’s compelling equity story and the long term prospects of the company.”

Chapel Hill Denham Advisory Limited acted as sole issuing house to the rights issue and is Nigeria’s best investment bank and best bank for advisory in Africa, according to Euromoney for 2019.

The management said at the 41 Annual General Meeting (AGM) that it would continue to develop and differentiate its brand portfolios, taking opportunities to grow sales and improve mix.

“Focus will be maintained on cost effectiveness and synergy delivery. We will target investments in production capacity, marketing and sales capability and business systems in order to drive medium-term growth,” the management noted.

 

Conclusion

The difficult business environment has made International Breweries, like its peers, unable to get out of the woods despite innovative and proactive responses.

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