New Telegraph

International Breweries sustains loss position on cost pressure

The increasing cost of operations and competition have impacted negatively on the profit margin of International Breweries Plc. CHRIS UGWU writes

 

The daunting challenges posed by strong macroeconomic headwinds, which include erratic supply of public electricity, falling naira, weak logistics, insecurity and other high costs of operations attributable to poor infrastructure, have continued to make the business operating environment difficult, especially for the real sector of the economy.

With fiscal and monetary headwinds leading to marked reduction in domestic output, manufacturers have continued to groan under pressure of increased cost of operations. Like any other sector in Nigerian and other emerging economies, 2020 was not an impressive year for the manufacturing sector following high costs of operations occasioned by COVID-19.

 

With the recent development, analysts believe 2021 doesn’t look much different for the sector either as the world battles with the second wave of the pandemic, which has heightened volatility in the economy.

 

This is because despite efforts by government to create an enabling environment for investment in the nation’s economy, the exchange rate volatility and its attendant effects have impacted businesses negatively.

The increase in exchange rate has forced manufacturers to borrow at a high rate, thereby increasing cost of productions, made worse by the infrastructure deficiency, which has inevitably transfer the high production cost to consumers as this had made manufacturers less competitive, shrinking their profit margins, as naira’s devaluation takes its toll on imported raw materials.

 

International Breweries Plc, like its peers, has not been able to sustain its performance despite innovative and proactive responses to market dynamics and competitive pressures. Market watchers attribute the depletion in revenue to stiff competition, rising cost of operations and drop in the value of naira, despite its innovation in the industry.

The company’s share price movement stood at N5.50 per share when the closing bell rang on Friday.

 

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 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 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 to 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 an average increase of six per cent 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 per cent, 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 -N5.8bn.

 

These positive surprises led to a 56 per cent lower-than-forecast pretax loss for Q2. Unaudited Q3’20 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 N10.9 billion from loss of N16.445 billon in 2019, while net assets grew by 1909.9 per cent from N7.5 billion to N150 billion.

 

The brewer ended the year 2020 on the red with a report of loss after tax of N12.365 billion for the full year ended December 31, 2020, from N27,790 billion loss reported in 2019. Loss before tax stood at N24.873 billion for the full year as against loss of N36.166 billion posted in 2019.

 

However, revenue grew by 3.35 per cent to N136.790 billion in 2020 from N132.351 billion recorded a year earlier while cost of sales stood at N106.315 billion from N107.144 billion in 2019.

 

International Breweries began the year 2021 also on the negative rout with a report of a loss after tax of N2.578 billion for the first quarter ended March 31, 2021, from a loss of N5.645 billion reported in 2020.

 

Loss before tax stood at N2.561 billion for the Q1 as against loss of N7.694 billion posted in 2020. However, revenue grew by 10.17 per cent to N38.964 billion in 2021 from N35.348 billion recorded a year earlier while cost of sales stood at N32.478 billion from N29.175 billion in 2020.

 

International Breweries reported a loss after tax of N13.887 billion for the half year ended June 30, 2021, from a loss of N9.357 billion reported in 2020. Loss before tax stood at N17.220 billion for the H1 as against loss of N11.982 billion posted in 2020. However, revenue grew by 35.22 per cent to N81.961 billion in 2021  from N60.614 billion recorded a year earlier while cost of sales stood at N66.542 billion from N51.075 billion in 2020.

 

International Breweries sustained negative profile for the following a loss after tax of N13.520 billion for the nine months ended September 30, 2021, from a loss of N10.877 billion reported in 2020. Loss before tax was N17.509 billion for the nine months in contrast to a loss of N17.719 billion in 2020.

 

Revenue however grew by 34.06 per cent to N128.396 billion from N95.768 billion in 2020, while cost of sales also increased by 25.07 per cent from N80.273 billion in 2020 to N100.405 billion in 2021.

 

Challenges/forward looking

 

HRM, Nnaemeka Alfred Achebe, Obi of Onitsha and Chairman of the Board of Directors, told shareholders at the 2020 Annual General Meeting (AGM) that “assessing our financial performance in 2020, the company continued to capture the changes in consumer behavior and proffered agile strategies to cover the effects of COVID-19 and other challenges.

 

 

“We delivered net revenue growth of 3.4 per cent in 2020, despite COVID- 19. Our Gross Profit increased by 20.9 per cent, which resulted from a reduction in production cost and continued increase in net revenue. “Overall, in 2020, we reported a loss for the year of N12.4 billion (2019: N27.8 billion).

 

This reduction in loss was as a result of deliberate strategy at costs reduction, using a zero-based budgeting approach, as well as the lower finance cost as a result of the reduction in overall debt after the rights issue in Q1’20, amongst other strategies.”

 

He noted that as countries continue to beat back the pandemic, with the gradual return to full activities and the roll-out of vaccines, there appears to be hope for the recovery of the global economy and the manufacturing and other sectors of the Nigerian economy.

 

“Our company should stay resilient in the evolving conditions and the possible lingering uncertainty ahead. We will continue to strengthen our market position through diversified development and optimisation of our corporate strategy.

 

“We will stay committed to achieving a sustainable development and uplifting our product quality to maintain our competitive edge. We are assured of the fundamental and proactive business strategies that have been built with a strong foothold as we get into a new financial year.

 

“Most importantly, we have a strong team of talented people with an ownership mindset to leverage our strong brands and assets as we look forward to a strong recovery,” Achebe said.

Last line

 

Though high cost of operations have remarkably weighed on the manufacturing sector, it is important for the company to keep managing its cost base tightly in order to maintain growth and profitability.

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