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NB Plc shine dims as market sours

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Nigerian Breweries increases prices of beer, blames rising input cost

…as harsh operating environment shows no signs of abating

By JULIUS ALAGBE

Before the COVID-19 lockdown, some blue-chip companies already experienced hard business times, such that not even the closure of borders in August 2019 by the government to stem the rash of smuggling into the country which affected most of the fast-moving consumer goods, FMCGs, could assuage their difficulties. The lockdown seems to have pour fuel to their fire.

Nigerian Breweries Plc represents this category of major companies whose business fortunes may have been dealt a far-reaching blow that will take some time to overcome. Already reeling under declining market share and rising costs before COVID-19 lockdown, the bottom may have been knocked off its prospects of recovery and improvement.

NB faced demand pressure in the first quarter (Q1) of 2020, its profit dipped more than 30% year on year. Going forward, analysts have forecasted demand pressure in the beer market due to the COVID-19 pandemic that has affected the performance of the economy. Before the virus shock, NB had started having it rough with increased competition. Major rivals have been bringing extra capacities, followed by aggressive marketing.

“Rivalry is going to be steeper going forward, as the industry has been severely impacted by black swan event”, equity analysts stated.

In its unaudited financials, revenue increased below 4% to ₦86.20 billion in Q1’2020 compare to ₦83.28 billion in Q1’2019. A relatively flat sales resulted in a 22% slash in operating profit, while profit before tax declined by 28% year on year. In the stock market, NB stock gained 10% on Wednesday from ₦30 a share to ₦33. The company’s market capitalisation thus settled at ₦263.897 billion.

WSTC Securities Limited analysts showed that there was no increase in excise duty recorded in Q1’2020, as the final round of increase took place in Q1’2019. They, however, attributed the marginal change in demand to low volumes, especially as there were price increases in Q4’2019.

“We think that the impact of price increases in the Q4’2019 was already reflecting in lower volume sales”, analysts explained.

Meanwhile, cost of sales was also relatively unchanged at ₦48.34 billion in Q1’2020 as against ₦48.22 billion in Q1’2019. Thus, the cost margin in Q1’2020 remained at 58%. However, gross profit declined marginally by 1% year-on-year, from ₦35.05 billion in Q1’2019 to ₦34.87 billion in Q1’2020.

Operating expenses

Operating expenses rose by 14% year-on-year, from ₦21.15 billion in Q1’2019 to ₦24.14 billion in Q1’2020. Within the operating expenses, marketing and distribution expenses recorded double-digit growth of 14%, from ₦16.56bn in Q1’19 to ₦18.79 billion in Q1’20. Administration expenses, on the other hand, grew by 16% year-on-year, from ₦4.60 billion in Q1’2019 to ₦5.34 billion in Q1’2020.

“In our view, the significant increases recorded in operating expenses, particularly on marketing and distribution, without a corresponding impact on top-line growth reflects the impact of intense competition in the industry, amid weakened consumer demand and the battle for a share of consumers’ wallet by the players in the brewing industry”, analysts stated.

Consequent to the higher operating expenses during the period, operating profit nosedived by 22%, from ₦14.06 billion in Q1’2019 to ₦10.92 billion in Q1’2020. Then, finance cost grew by 2%, coming from ₦2.59 billion in Q1’2019 to ₦2.64 billion in Q1’2020.

The higher finance cost incurred during the period, despite a low yield environment, resulted from a 76% surge in total borrowings of the Group from an average of ₦43.71 billion in Q1’2019 to an average of ₦77.10 billion in Q1’2020.

In Q1’2020, the Group obtained a net borrowing of ₦30.25 billion (new borrowing was ₦61.23 billion, repayment of borrowing was ₦30.95 billion) to finance its capital expenditure and other operational activities in Q1’2020.

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However, cash flow from operations dipped by 62% from ₦11.75 billion in 2019 to ₦4.43 billion in Q1’2020. Resulting from a higher VAT rate that became effective in February 2020, the Group recorded a 24% increase in VAT paid from ₦3.98 billion in Q1’2019 to ₦4.94 billion in Q1’2020.

Hence, net cash flows from operations were a negative of ₦1.17 billion in Q1’2020 as against positive flow of ₦7.33 billion in the comparable period. The unaudited financials show that cash flows used in investing activities increased by 19% year on year, from ₦7.46 billion to ₦8.91 billion.

The net borrowings of ₦30.25 billion, representing a 954% year-on-year increase from a ₦3.17 billion net borrowings in Q1’2019, helped the Group to finance its operations.

Analysts at WSTC stated that the significant increase in net borrowings in Q1’2019 could be attributed to the sharp rise in the need to stay liquid amid potential financial imbalances that the COVID-19 pandemic could bring in subsequent periods of the year.

Therefore, the higher finance cost in Q1’2020 worsened the bottom line, as reflected by the 28% decline in profit before tax from ₦11.46 billion in Q1’2019 to ₦8.28 billion in Q1’2020. Profit after tax also dipped by 31% year-on-year, from ₦8.03bn in Q1’19 to ₦5.51 billion in Q1’20.

Outlook

The brewing industry is expected to be severely impacted by the outbreak of the coronavirus pandemic in the Nigerian economy.

“We note that the pandemic has its effects on both the demand and supply side. On the demand side, the lockdown/stay-at-home directive of the government, social distancing directive will affect demand and social gatherings such as burial and weddings are restricted; as well as possible job losses (thereby lower household income) are the major issues”, analysts explained.

WSTC explained that major issues on the supply side have to do with the disruptions in the supply chain and closure of hotels and bars.

“The double-whammy of demand and supply disruptions is to take its toll on the financial performance of Nigerian Breweries. We expect to see continued pressures on the Group’s top line and bottom line in the subsequent periods of the year (till at least Q3’20)”, analysts remarked.

Analysts further stressed that the survival of the players in the brewing industry will be largely dependent on the liquidity and capitalization of brewing companies.

“We think that NB is well-positioned to weather the storm, at least relative to its peers. We also link the level of the increased borrowing of the Group to the preparation of the Group ahead of the uncertainties ahead”, WSTC stated.

Valuation

Analysts at WSTC Securities had previously projected a 2% revenue growth, on the back of increased volume and normalisation of the excise duty in FY’20. They also projected a 6% year-on-year profit before tax growth in FY’20, on the back of lower finance cost and debt levels.

However, WSTC stated that the economic realities have changed resulting from the black swan event caused by the outbreak of the coronavirus.

“On the potential impact of naira devaluation, we do not expect to see any significant pressures on the Group’s performance”, analysts remarked.

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WSTC then revised its estimates and outlook for the Group.

“We now project revenue and profit after tax decline of 5% and 33%, respectively, in FY’2020.

The firm explained that the projected steep decline in bottom-line reflects expected stable or higher operating expenses, relative to revenue. The earnings per share estimates were revised to ₦1.35 for 2020 as against ₦2.21 projected in 2019, though NB settled at ₦2.01.

“We further expect the Group to maintain its historical 100% dividend payout for the year. Also, we expect to see pressured cash flows in FY’2020”, analysts stated.

WSTC observed that in Q1’2020, inventories grew by 6% from ₦38.52 billion in FY’19 to ₦40.86 billion in Q1’2020. Then, trade receivables spiked by 34% from ₦21.31 billion in FY’19 to ₦28.61 billion in Q1’2020.

“From our perspective, these strengthened our argument on the demand and supply issues faced by the Group. We believe that there will be more relaxed credit decisions by the Group to spur demand”.

Due to the changes, WSTC downgrade fair value estimate for the Group to ₦28.66 compare to ₦47.04 previously forecasted. At the current market price of ₦30.00, the stock’s earnings and dividend yields stand at 4% and 4% respectively.

Meanwhile, analysts said they expect the Group’s return on equity (ROE) to lower to 7% in FY’20. In 2019, ROE was 10% and 11% in the corresponding year in 2018.

“Based on our valuation, the price return of the stock stands at -4%, while the dividend yield stands at 4% as well. The stock’s total return of 10% is positive, and therefore, underpins our HOLD recommendation”, analysts at WSTC Securities Limited stated.

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