Impressive Revenue Recovery Fails to Return INTBREW to Profitability

Impressive Revenue Recovery Fails to Return INTBREW to Profitability

Amidst pressure in the operating environment, INTBREW reported strong recovery in alcohol demand in particular.

Largely, this supported and drive its third quarter (Q3) revenue level, a rebound from pre-pandemic sales level.

But, it could only reduce the brewer’s loss position by cents, as competition, excise duty and devaluation of Naira remain downside to earnings performance.

Meanwhile, it is important to note that INTBREW peers are also grappling with multiple threats but then, they have sizeable market advantage.

For the industry, it is survival of the fittest going forward as household’s disposable income become weak due to high food prices and lower purchasing power among others issues.

Unlike the first half of the year when revenue was down 11.68% year on year, the brewer posted a comparatively stronger third quarter performance which lifted overall revenue for 9M-2020 to ₦95.77 billion.

Despite the feat, this is still 1.53% below revenue position in the comparable period in the financial year 2019.

The upsurge in sales during the quarter rode on the back of recovering demand for alcoholic beverages, particularly as on-trade sales channels came back on stream.

Meristem Securities Limited said although it considers INTBREW’s product-price mix as a source of competitive advantage, the firm envisages that alcohol demand would come in slower than is usually witnessed in the celebration ridden Q4 period.

“Our view is also informed by pressured disposable incomes and even weaker purchasing power as consumers continue to grapple with surging inflation.

“It is important to mention that consumers at the value end of the market which are naturally drawn to the price discounts that INTBREW offers may have been disproportionately affected by current economic realities”, analysts added.

As a result, Meristem Securities now expect Q4 sales to come in 14.50% lower and for 2020 revenue to drop by 4.97% to ₦125.77 billion from ₦132.35 billion in 2019.

Rising Production Costs Still a Pressure Point

Meristem Securities reckoned that INTBREW recorded double digit year on year growth (+26.01%) in cost of sales in the third quarter.

This sets overall cost to sales for 9M-2020 higher at 83.82% from 79.29% in 9M-2019 – with depreciation and amortization expenses leading the charge.

As at 9M-2020, INTBREW had incurred a cumulative ₦4.74 billion spike in depreciation and amortization charges.

In contrast, operating expenses fell to ₦26.03 billion, from ₦31.31 billion as at 9M-2019 as the brewer rolled back its marketing campaigns in line with the trend established in H1-2020.

Nonetheless, analysts explained that combination of weak revenues and elevated production costs saw INTBREW’s operating loss worsen by 45.26% year on year to ₦15.89 billion from ₦10.94 billion in 9M-2019.

Lower Finance Costs and a Tax Credit Support Bottom-Line

In the period, higher finance income which came at ₦1.35 billion as against ₦1.77 million reported as at 9M-2019 and lower finance costs totaled ₦3.17 billion as against ₦13.13 billion recorded as at 9M-2019 reduced the burden from interest payments.

At just ₦1.83 billion, net finance charges for 9M-2020 showed a significant 86.09% year on year improvement over 9M-2019 levels.

The brewer also benefitted from tax credit of ₦6.84 billion which settled its loss after tax position at ₦10.88bn from ₦16.45 billion as at 9M-2019.

For the rest of the year, analysts at Meristem reiterates expectation of the firm remaining in a loss position due mainly to lingering cost pressures.

Outlook

As highlighted in H1:2020, Meristem said it bearish outlook for INTBREW is informed by pre-existing industry headwinds (intense rivalry, excise duties and soft consumer spending) as well as the impact of COVID19 on sales.

For 2020, the firm revised earnings before interest tax depreciation and amortisation (EBITDA) margin estimate to 6.50% and cut target enterprise value (EV) to EBITDA multiple to 20.70x.

This yields a target price of ₦4.05 – presenting a downside potential of 41.30% when compared to its closing price on November 9, 2020.

While there was 1.5% decline in sales to ₦95.8bn in 9M-2020 from ₦97.3bn in 9M 2019, there was a strong revenue recovery in Q3-2020 stand alone.

Specifically, INTBREW revenue recovered strongly as sales jerked up 39.1% quarter on quarter and 22.8% year on year to ₦35.2 billion in Q3-2020 from ₦25.3 billion in Q2-2020 and ₦28.6 billion in Q3 2019.

This happened on the back of the removal of covid-19 restrictions on gatherings and re-opening of on-trade consumption channels (clubs, bars etc.) in a traditionally weak Q3.  

Meanwhile, CSL Stockbrokers explained that the brewer’s cost of sales adjusted for depreciation declined faster than revenue.

After it has been adjusted for depreciation (non-cash flow item), cost of sales dropped down 2.4% year on year to ₦64.4 billion in 9M-2020 from ₦66.0 billion in 9M-2019.

“We note that on a quarter on quarter basis, cost of sales adjusted for depreciation grew 35.8% below Q3-2020 quarter on quarter revenue growth.

“We believe the company is finally enjoying the benefits of weaker commodity prices in the international market despite elevated pressures from the recent spate of naira devaluation”, CSL Stockbrokers stated.

The firm also noted that excise payments (lager beer) per hl is now flat on a year on year basis in Q3-2020.

Consequently, Q3-2020 gross profit swelled up 45.9% quarter on quarter to ₦12.1 billion from ₦8.3 billion in Q2-2020.

Taking this further, 9M-2020 gross profit edged higher by 0.3% year on year to ₦31.3 billion from ₦31.2 billion in 9M-2019.

Thus, for 9M-2020 gross margin also expanded by 0.6 percentage points to 32.7% while Q3-2020 gross margin strengthened by 1.6ppts.

Furthermore, the company was able to keep operating expenses under control.

INTBREW operating expenses adjusted for depreciation declined 16.8% year on year to ₦18.4 billion in 9M-2020 from ₦22.1 billion in 9M-2019.

Analysts said the decline in operating expenses was driven by lower marketing & promotion expenses.

Marketing and promotion expenses sloped down 28.8% year on year to ₦8.4 billion in addition to lower administrative expenses adjusted for depreciation which declined 3.1% to ₦10.0 billion in 9M-2020.

However, INTBREW booked other losses of ₦5.4 billion in 9M-2020 due to FX losses of ₦12.6 billion.

“This exerted significant downward pressure on operating performance as the company reported operating loss of ₦15.9 billion in 9M-2020”, CSL Stockbrokers stated.

However, the firm recognised that the company’s deleveraging efforts continued to yield positive results as net finance cost fell 86.1% to ₦1.8 billion in 9M-2020 from ₦13.1 billion.

The decline in net finance cost was on the back of 75.8% decline in finance cost line to ₦3.2 billion and significant uptick in finance income.

Finance income rose to ₦1.3 billion in 9M-202 from ₦1.8 million.

So, the decline in finance cost reflects the company’s lower debt balance of ₦108.5 billion as at 9M-2020 compared with ₦225.2 billion in 9M-2019.

Meanwhile, the increase in finance income reflects stronger cash generation in 9M-2020 as Cash & Cash Equivalents surged 36.8% despite the weak interest rate environment.

As a result, loss before tax declined 26.4% year on year to ₦17.7 billion in 9M-2020 from ₦24.1 billion in the comparable period.

Considering the lower loss before tax, the company recorded a lower tax credit (down 10.3% to ₦6.8bn) in 9M 2020.

Nevertheless, INTBREW settled the period negative as net loss for the year declined 33.9% to ₦10.9 billion in 9M-2020 from ₦16.4 billion a year ago.

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Impressive Revenue Recovery Failed to Return INTBREW to Profitability