GCR Affirms Nigerian Breweries Ratings, Cites Low Cash Holdings
Emerging market focus rating agency, GCR Ratings (GCR) has affirmed the national scale long-term and short-term Issuer ratings of AA+(NG) and A1+(NG) respectively assigned to Nigerian Breweries Plc, with the outlook revised to stable.
The brewer’s top-notch ratings are affirmed, though its liquidity position is assessed as weak given its large short-term obligations.
According to GCR, Nigerian Breweries’ cash holdings of N22.1 billion in December 2022 and the projected cash flow are not sufficient to meet maturing short-term debt of N119.8 billion.
Also, there is an estimated capital spending of N30 billion in the pipeline in the current year but the company is noted to be enjoying its parent support.
The rating note indicated that about EUR110 million in shareholder loans is expected from the parent company in 2023 to support debt restructuring and capital spending.
According to GCR, the affirmed ratings of Nigerian Breweries Plc reflect its strong competitive position as a leading player in the industry.
It said however, this is somewhat offset by rising pressure on leverage metrics due to higher working capital absorption and debt level.
The rating firm said NB maintains a leading position as the dominant brewer in Nigeria, buoyed by a rich portfolio of about 19 brands within its alcoholic and non-alcoholic product segments, including well-established premium and mainstream brands.
This position is further strengthened by its high market share at about 60%, largely underpinned by its substantial production capacity, the rating note added.
GCR said Nigerian Breweries’ extensive distribution network, continuous product innovation, robust customer base, and strategic support from its parent Company are expected to continue to reinforce its dominance in the industry.
“In a bid to reduce reliance on imported inputs, NB continued to partner with and invest in the development of local farmers and suppliers of sorghum, thus mitigating supply chain disruptions and commodity price dynamics”.
The company has reported sound revenue progression over the review period, peaking at N550.6 billion in the financial year 2022 versus N437.3 billion reported in 2021.
According to the rating note, this growth was driven by higher traded volumes of premium brands and inflation-induced price increases.
Nevertheless, the company’s operating costs escalated significantly during 2022 on account of rising raw material input costs, soaring energy prices, foreign currency illiquidity and the continuous Naira devaluation.
As Nigerian breweries could not fully pass on the additional cost to customers, EBITDA margin narrowed further to 16.2% versus 18.2% in 2021, and 20.1% in 2020, albeit remaining in line with the peer average.
“We note the lower sales volume and pressure on earnings as of 1Q-2023 due to cash shortages following the Central Bank of Nigeria’s naira redesign policy.
“Overall, we expect 10%-15% revenue growth over the outlook period as the cash situation has normalised, with higher volumes for the rest of the year and continued price increases”, GCR stated.
Furthermore, analysts said the company’s earnings margin should remain under pressure due to the high inflationary environment, with a continuous impact on direct costs and other operating expenses.
In the note, GCR stated that the company’s leverage and capital structure remain positive to the rating but is slightly weakened by its higher debt position due to rising working capital pressure and huge capital investments.
Gross debt (largely short-term) rose to N122.3 billion in financial 2022, according to analysts, as against N31.4 billion in 2021 due to rising working capital absorption.
Nigerian Breweries working capital absorption was driven by higher inventories, trade receivables, and payment to suppliers.
Thus, its net debt to EBITDA weakened to 1.1x in financial 2022 versus 0.2x in 2021, albeit remaining within a strong level, GCR Ratings said.
Similarly, the company’s operating cash flow coverage of debt which has averaged 98.6% over the last five years plunged to 14.9% in 2022 due to the rising working capital pressure.
Conversely, net interest coverage improved to 11x, a better position compared with 7.7x reported in 2021 on account of the stronger EBITDA. Over the outlook period, GCR expects net debt to EBITDA to remain within strong levels on the back of improved earnings, while operating cash flow coverage should improve to above 40%.
This expectation stems from higher earnings and stringent working capital management translates into stronger cash flow, analysts posit. GCR considers Nigerian Breweries’ liquidity assessment weak as cash holdings of N22.1 billion in December 2022 and the projected cash flow are not sufficient to meet maturing short-term debt of N119.8 billion and an estimated capital spending of N30 billion in financial 2023.
“Even after factoring in a portion of inventories as it comprises primarily fast selling beers and beverages products, the uses vs. sources coverage is estimated below 1x over the 12-month period to 31 December 2023”, it noted.
Notwithstanding this, GCR notes that the company has access to a wide range of non-committed facilities from financial institutions, as well as the Nigerian debt market, which should provide adequate liquidity support.
In addition, about EUR110 million in shareholder loans is expected from the parent company in 2023 to support debt restructuring and capital spending. #GCR Affirms Nigerian Breweries Ratings, Cites Low Cash Holdings
