GCR Downgrades Nigerian Breweries Ratings, Outlook Evolving
GCR Ratings (GCR) has downgraded Nigerian Breweries Plc’s national scale long-term Issuer rating to AA(NG), from AA+(NG) previously, but affirmed the short-term rating at A1+(NG).
The emerging market rating firm stated that the outlook on the rating has also been revised to evolving from stable. According to its rating note, evolving outlook reflects expectation that the ratings could be upgraded or downgraded in the near term, depending on the unfolding events within the group, particularly the expected equity injection through the proposed Rights Issue.
According to GCR, the rating downgrade of Nigerian Breweries Plc reflects the weakening in its leverage and capital structure due to elevated debt to finance its rising working capital requirements and the expansion projects.
It noted that the group reported weak operating cash flow and huge foreign exchange losses, which have eroded shareholders’ funds. GCR analysts hint that they have factored in group support considerations into the ratings, reflecting the history of strategic support from its parent company, Heineken N.V. (Heineken).
GCR has negatively adjusted the risk score of NB’s leverage and capital structure to reflect the deterioration in leverage metrics arising from increased debt level amid moderated earnings, the rating note stated.
Nigerian Breweries gross debt more than doubled to NGN341.6 billion in financial year 2023 from N122.3 billion in 2022. The company gross debt rose further to N469.7 billion in Q1 2024, according to the rating note.
GCR said the debt escalation ensued from additional loans obtained to support increased working capital pressures and capital expansions amid high inflation and Naira devaluation. Consequently, net debt to earnings before interest tax depreciation and amortisation (EBITDA) which has historically registered below 1.2x weakened to 3.4x in 2023.
However, the company’s net debt to EBITDA slightly softened to 2.8x in Q1 2024 on the back of stronger cash holding, according to the rating note.
Despite higher trade and other payables to related parties, operating cash flow (OCF) was negative in 2023 and Q1 2024 due to the huge losses on foreign exchange obligations, GCR said in its latest update.
Analysts further noted that EBITDA coverage of net interest weakened to 2.5x in 2023 and 2.1x in Q1 2024 (2022: 11x) on account of high finance charges from the huge debt level, and amid the high interest rate environment.
The group’s plan towards raising up to N600 billion in Rights issue is expected to help deleverage the balance sheet and improve capital structure. Analysts expect proceeds from the Rights Issue to be committed towards settling the foreign currency denominated related party payables, shareholder loan, as well as maturing bank debts.
Therefore, barring further rapid debt utilization, GCR analysts forecast gross debt to lower to around N100 billion in 2024, with strong cash holdings and net debt to EBITDA below 1x.
However, the company’s operating cash flows cover is expected to remain negative as payables are settled, while net interest cover should remain weak under 4x in 2024.
According to the rating note, Nigerian Breweries revenue grew by 8.9% to N599.6 billion in 2023, against 29.7% and 25.9% growths registered in 2021 and 2022 respectively. The moderated growth in 2023 stemmed from the prevailing economic challenges and the lower sales volume as consumers traded down on premium brands.
Meanwhile, operating costs escalated significantly on account of higher input costs, soaring energy cost and foreign currency volatility, details from the ratings note stated. Resultantly, EBITDA margin narrowed to 14.9% from 16.2% in 2022 as the group was unable to fully pass on the additional cost despite upward price adjustments.
Overall, the group reported a net loss of N106.3 billion after accounting for net finance costs of N35.9 billion and the foreign exchange loss of N153.3 billion resulting from the Naira devaluations.
Positively, GCR noted the strong annualized revenue growth of 84.9% posted in Q1 2024, bolstered by price hikes. Nonetheless, earnings margins remain squeezed in Q1 2024 as EBITDA margin moderated further to 13.9%, the emerging market ratings firm stated.
Looking ahead, GCR analyst forecast Nigerian Breweries revenue growth to hover around 30%-40% over the outlook period, underpinned by price increases.
However, analysts expect earnings margin to remain compressed, hovering between 13.5%-14.5% due to persistent inflationary pressures. “We project further net losses, albeit slower, over the next 24 months”, the firm stated in the rating note.
Liquidity assessment of the Nigerian Breweries was positive to the rating, according to GCR, underpinned by cash holdings of N52.6 billion as of 31 March 2024 and available committed facilities of N21 billion as of 31 March 2024.
“We forecast that at least 80% of the proposed N600 billion Rights Issue would be raised this year to support liquidity. These liquidity sources are deemed adequate to cover the huge maturing debt obligations of N297.5 billion in 2024, the estimated capital expenditure of N45 billion, as well as the high working capital absorption arising from the settlement of trade and other payables”.
Overall, liquidity coverage is estimated at 1.3x over the next 9 months to December 2024, and 1.1x for the next 21 months to December 2025.
GCR explained further that Nigerian Breweries ratings are supported by the company’s strong competitive position as Nigeria’s largest brewer, controlling over 50% of the country’s beer market.
“The group has a wide geographical reach, robust customer base and enjoys strategic support from its parent company, Heineken. Its business profile is also buoyed by a rich portfolio of 20 brands as well as a substantial production capacity of about 15 million hectolitres.
“We note the suspension of operations at two brewing plants, with focus on optimisation of production capacity in seven other breweries. However, this is not expected to disrupt production levels. As part of its expansion strategy, the group recently acquired Distell Wines and Spirits Nigeria Limited”.
NB continues to invest in the development of sorghum as an alternative input in order to mitigate supply chain disruptions, aid import substitution and defend margins.
“We have factored in parental support considerations to the ratings. This is anchored on the strategic support from the broader Heineken group to NB over the years, notwithstanding that financial contribution of NB to the group is small. NB is majority owned (57%) by Heineken and the two businesses share some branding”, GCR stated.
The rating firm said Heineken group’s entities have a track record of providing technical support and have been supportive in sourcing raw materials for NB. Heineken’s commitment towards the proposed Rights Issue is also reflective of the ongoing support. NNPC E&P, NOSL Hit First Oil in OML 13 Akwa Ibom State
