Rising cost, competition weigh down NB Plc
By JULIUS ALAGBE
Depending on the angle where analysts and investors are looking at the Nigerian Breweries Plc assessment rating from BUY, SELL or HOLD recommendations, the leading brewer in the country seems to have it all. NB dominates Nigeria’s brewery market with about 60% market share and a brand portfolio that includes lager beer, stout beer, non-alcoholic malt drinks, carbonated soft drinks and ready-to-drink brands.
With cost to sales ratio at 57.6%, analysts are of the view that NB Plc would still be able to retains its cost leadership in the industry, compare with competitors – INTBREW: 66.6%, GUINNESS: 65.2%.
But competition in the beer market has stopped being usual. Established channels of distribution are failing to performing magic, at least like in the past. Consumers are becoming more sensitive to both pricing and taste; and where they find alternative products, they are exploring.
The market trend in the recent time has shown that competitors are becoming more aggressive and riding on level playing ground with NB despite its market share and the gamut of advantages it is enjoying from feasible economic of scale. To sustain market leadership, NB has been spending more and this has started to have direct impact on its numbers.
In the first quarter of 2019
At the end of first three months in 2019, Nigerian Breweries Plc sold more and revenue increased by 3.33% from N88.445 billion in the first quarter of 2018 to N91.387 billion. However, the fact that NB is finding it difficult to increase prices of its legacies beers as excise duties take toll on its cost impacted on net revenue. In the quarter, net revenue rose quite insignificantly because 48% increase in excise duties wiped off the impact of increased revenues. For the quarter, net revenue closed the first quarter at N83.277 billion.
Gross profit went down by 7.8% on the back of about 7.3% increased cost of sales. The need to strongly push products through channels, as rivalry increases as NB considers the reaction of its major competitors to increase prices of beers, raised marketing and distribution expenses by about 8%.
When net finance cost increase by 7.63%, it means that NB interest obligations went up because of 75% decrease in finance income followed by a 6.36% increase in interest cost for the quarter. There is an indication that the brewers’ performance may be negatively affected this year. By this time in 2018, NB had raked in N15.249 billion as pretax profit. Fast forward to corresponding quarter in 2019 the company pretax profit dropped by 24.8% to N11.457 billion.
NB in numbers
In its audited financial statement for 2018, key performance metrics or figures of the company went south. Net revenue went down by 5.8% just as gross profit shed weight by 11.6% while operating expenses increased by 2.5% while other income line nosedived by as much as 60.5%. Though net finance cost tapered by 28% pretax profit still underperformed estimate as it tailed off by more than 36% of its preceding year value.
In numbers, NB sold beers worth N350.23 billion in 2018. This was about 5% lower the amount sold in 2017. Lower sales followed from declined consumers demand. Meanwhile, from this amount, excise duties paid took off more than N25.84 billion, having moved up by 21.5% from N21.27 billion the company paid in 2017.
The front line activities led to 11.56% year on year decline in gross profit which settled at N126.9 billion as against N143.4 billion recorded in 2017. However, operational support claims against gross profit showed mixed reaction to the activities. Selling and distribution expenses answered to pressure as its overhead escalated by 4.77% from N66.86 billion to N70.05 billion, however below average rate of inflation in 2018. But the impact was reduced followed by 4.43% decline in administrative expenses.
Stock performance and valuation
At the end of January 2018, it would have cost you about N1.2 trillion to buy up all the Nigerian Breweries Plc shares on the floor of Nigerian Stock Exchange. Investors’ perception of the company’s stock was high as a share was trading at about N150.
Fast forward to 2019 when the audited result came out NB stock has depreciated by more than 130%. Shares volatility connects to fundamentals; and this is the drivers of investors’ sentiment plus quality of corporate governance. That’s the premium aspect of valuation these days.
The plus is NB remains the market leader. It controls about two-thirds of the market and the benefits of economic of scale are seen in its cost structure until government policy on excise duties came up. But NB has many challenges to overcome in 2019 if the result is anything to go by. By market capitalisation NB is about N524 billion as the share is trading at N65.10 which is 14.81% above 52-week low of N56.70 kobo.
However, five years ago investors placed premium price on the share because they perceived that NB was on top of its game. Strong fundamentals backed by stable economic performance, high disposable income and enough social economic buffer watered down policy shocks.
But sentiment is waning and investors are discounting the unit price of ownership with sell pressure on the bourse. When a company controls the larger chunk of the market share in an industry, combining price and quality for stable equilibrium point, then investors are rest assured and would be willing to pay more.
This seems unlikely, not in the immediate term with market tightening from rivalry and government policy which has adjusted the status quo overnight – not to mention the fact that other brewers are more willing to take fight to NB door with pricing. And regional taste is shifting demand and supply.
How much value do Analysts put on the pressure?
Investment banking analysts have been able to price the risk facing the NB Plc. Competition for consumers’ wallets has been high and it will get higher in 2019, some analysts have noted. The increase in disposable income by households occasioned by adjustment made to minimum wages would provide a buffer but excise duties pressure would take away this advantage.
One of the factors that is driving the sales pressure and inability of NB to increase sales volume is occasioned by AB-InBev’s integration of its Nigerian subsidiaries. CardinalStone Partners reckoned that stronger investment in newer brands by the competitor pose a significant threat to NB’s market share. Consumers shifted attention to Hero, Trophy for the fact that International Breweries Plc didn’t subscribe to increase in price of its products when NB raised prices of Star Radler, Life, and Goldberg.
“At the start of the year, we had anticipated volume-induced revenue growth in FY’18 for NB, on the back of expected recovery in consumer wallets. However, we highlight that an exit from recession has not materially translated to improved consumer spending.
“That said, we recall that the impressive revenue growth in the past financial year was majorly driven by price increases and had expected the brewer to cement its market leadership by growing volumes through competitive pricing and improved route-to-market strategies—specifically on flagship products such as Heineken and Star.
However, AB-InBev’s integration of its Nigerian subsidiaries, capacity expansion and introduction of new products has heightened competition in the brewery landscape through attractive price points”, CardinalStone analysts noted.
Obviously many industry’s analysts are not all positive about the future performance of NB in terms of sales and volume growth. There is general view that NB won’t have it so easy again. Both local and foreign investors are taking note.
ARM research gave a sell rating on NB stock. The firm observed that NB would be faced with bleak outlook as fresh pressure points kick in. The firm noted that following its financial year 2018 result, and the management plans to raise products price in 2019 outlook is uncertain.
ARM observed paucity of insights into the numbers at the analysts call, but noted that the key take-away was management’s guidance to raise product prices this year as due to higher excise duty which increased by 17%.
“While the higher excise duty provides premise for a price hike, we think the decision to raise prices on its mainstream products cannot be done in isolation. Particularly, given the turn of events last year where NB reversed price hike on its mainstream – Goldberg and Life following IB’s decision to leave prices unchanged, we think NB’s decision to pass-on excise duty hikes to consumers lies with IB’s resolve to tow similar path”, ARM research reckoned.
On that noted, ARM forecasts a tamer 0.8% growth in net revenue to N327.1 billion in 2019, lower than average revenue growth of 9% over the past five years. Analysts also forecast higher finance expense over 2019. Following the drawdown of its revolving facility over 2018, said that they have raised borrowings by 6% to N43.5 billion.
Vetiva capital also noted that NB underperformed growth expectation. The firm is of the view that volume growth would continue to struggle in amidst sustained weakness in consumer demand as well as rising competition in the beer market.
“NB took selective price increases in May and June, the company has reportedly rolled back this pricing action in July in a bid to compete effectively with a major competitor that left prices unchanged”, Vetiva capital noted. Like many other investment banking firm who are following bearish line with NB fundamentals, Vetiva capital adjusted its forecast downward.
FSDH observed the pressure. The firm said that the challenging business environment, an increase in the rate of excise duty, increased competition from incumbent operator, Guinness Nigeria, weak consumer purchasing power and the new industry challenger, Anheuser-Busch InBev reduced the market share of NB and increased its cost of operations.
“The company contracted new borrowing in order to finance its business operations during the year. We noticed an increase in NB’s trade receivables, a strategy to encourage its distributors to carry more of its goods but also an indication of difficulties in converting sales to cash”, FSDH said.
The company has tied down significant cash in its trade receivables and inventory. Finished goods consisted of 21.41% of inventory in2018 compared with 17.94% in 2017. This reveals that more stock of finished products could not be sold in 2018 compared with 2017. We note, however, that NB relied heavily on free credit from suppliers and distributors to finance its operations.
Proceeds from loans and borrowing of about N31.8bn contributed to the cash inflow in the year under review. However, acquisition of property, plant and equipment, repayment of loans and payment of dividend depleted the cash. The ratio of the cash profit generated from core operating activities to revenue decreased to 19.52% in 2018 from 24.07% in 2017. This means that less of its revenue translated into cash in 2018 than in 2017.
The net cash generated from operations was barely sufficient to cover the investment needs of the company. NB recorded a net cash outflow of N2.07bn in the year 2018 compared with a net cash inflow of N4.11bn it generated in 2017. The operating margin of the company dropped in 2018 compared with 2017, which means an increase in the cost of operations and is a stark reflection of the challenging business environment.
The Gross Profit margin decreased to 36.23% in FY 2018 from 39.23% in FY 2017 while the earnings before interest andtax (EBIT) margin dropped to 18.97% from 24.55% in FY 2017. The profit before tax (PBT) margin decreased to 8.40% in FY 2018 from 12.75% in FY 2017. The profit after tax (PAT) margin dropped to 5.55% in FY 2018, from 9.03% in FY 2017. The return on equity (ROE) of the company declined from 25.63% in 2017 to 14.87% in 2018.
However, NB has implemented certain strategies to maintain its market leadership despite the shrinking market size. These measures include continuous product innovation leading to development of value products to take a share of consumers’ wallets, investment in route-to-market, introduction of a suppliers’ finance scheme – with benefits of extended payment terms and quick access to cash for suppliers. Following the merger with Consolidated Breweries effective December 2014, parent company, Heineken maintains a 52% controlling stake in the larger entity.
Efforts to reach the spokesperson of the company, Ms Shade Morgan failed as she failed to respond to our questions nor returned calls.