IntBrew: Analysts Downgrade Stock after Unimpressive Results
Equity analysts at WSTC Securities Limited have downgraded International Breweries shares to sell (Ticker: IntBrew) over persistent loss-making. In the second quarter result, the brewer lost 42 kobo on every share deployed for operation – three times higher than the 14 kobo loss per share recorded in the first half of 2020.
In the equity report, WSTC said the performance of the company in the second quarter of 2021 was largely in line with analysts’ expectations. However, they noted that the foreign exchange (FX) losses incurred were above expectations.
But, there is a low base effect that makes the result look stellar when it is not, really. IntBrew appears to be breaking value with persistent loss-making which is draining cash position to such extent that the brewer’s made adjustments to its financing strategy – basically extending tenor.
From the right issue, it was able to convert its short term borrowings to long term, signalled a possibility of cash stress and working capital trap.
In terms of core operations, WSTC analysts said they noted improvements made by the Company in its market expansion drive, posited that the increased marketing spend was in view to drive topline growth.
“Going forward, we maintain our position that the company’s market expansion focus will be accretive to topline. However, the IntBrew still faces significant cost pressures due to its soft pricing, relative to industry peers”.
The investment firm analysts raise the brewer’s cost margins projections to reflect expectations of higher cost pressures in the near to medium term.
In its new estimate, analysts lower the fair value for the stock to N4.32 from N4.80, adding that IntBrew is currently trading at a 15% premium to its fair value estimate.
International Breweries reported a 70% year on year revenue growth in the second quarter of 2021, attributed to a combination of price and volume growth.
On volume growth, analysts posit that the company consolidated its strategy of increased market penetration, as its products continued to enjoy strong demand.
On price growth, it was noted that the higher input costs necessitated the need to raise prices.
“We also link the overall revenue growth to the base effect, given a lower-than-average revenue in the second quarter of 2020 during the peak of the coronavirus pandemic”.
Though the result came largely unimpressive, the company was able to manage its cost better than the previous record.
Cost margin improved to 79% in the second quarter of 2021 from 87% in the comparable period in 2020, on account of a slower pace of increase in the cost of sales. The company’s cost of sales jumped 56% year to N34.06 billion in the second quarter from N21.90 billion.
In the equity report, analysts said they believe that economies of scale and price realisation resulted in the lower cost margin recorded in the second quarter of 2021.
The company witnessed a 165% year on year growth to N8.93 billion in the period from N3.366 in the comparable period when the pandemic hit earnings performance.
Mounting additional pressure, the company’s operating expense increased by 52% to N11.27 billion in the second quarter of 2021, driven by a 220% upsurge in marketing expense which printed at N4.71 billion during the period.
“We link this to heightened competitive pressures in the brewing industry, amid declining households’ purchasing power”, WSTC analysts added.
Year on year, the company incurred an operating loss, as operating income generated could not cover operating expenses in the second quarter.
However, analysts said N2.33 billion operating loss incurred in this period was an improvement relative to the N4.05 billion operating loss incurred in Q2 2020.
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WSTC said IntBrew’s non-operating loss, however, worsened by 4,631% year on year to N11.32 billion in Q2-2021, resulting from realised and unrealised foreign exchange losses. Analysts attributed this to the exchange rate devaluation that took place in the second half of 2020.
The company settled with a N13.66 billion loss before tax in Q2-2021, from a loss of N4.29 billion in Q2-2020; while loss after tax stood at N11.31 billion in Q2-2021 from a loss of N3.71 billion a year ago.
IntBrew: Analysts Downgrade Stock after Unimpressive Results
