INTBREW: Loss-Making Streaks Pose Big Threat to Survival
International Breweries (Ticker: INTBREW) Plc.’s weak earnings temperature poses a big threat to the company’s survival as loss-making streaks continue while efforts to reduce costs dampened with Naira devaluation.
In 2020, the brewer records yet another loss after tax, though demand appears to have a rebound brewer faces multiple pressures including industry rivalry, thin consumers wallets.
Consensus analysts estimate showed International breweries is more likely to return yet another negative results in the financial year 2021.
“Estimates imply the brewer would end the current year in a loss position, with expectations for a return to profitability -and the possible resumption of dividend payments – now further out in 2023”, Meristem Securities said.
In its outlook for 2021, analysts at United Capital Plc. are anticipating a strong revenue rebound, which is expected to be driven by improved volumes and pricing power.
After considering the company’s position, analysts at Meristem Securities forecast a 7.44% year-on-year increase in revenue to N146.96 billion from N136.79 billion.
The brewer, according to Meristem Securities limited, managed to sustain its upward revenue trajectory after a shaky start to the 2020 financial year.
INTBREW reported a 3.35% growth in revenue to N136.79 billion, overcoming a challenging first half during which revenue was down 11.68% due to social restrictions and the absence of on-trade sales.
Analysts said a gradual reopening of on-trade channels and festivity-driven demand fueled the rebound in third and fourth-quarter sales -up 22.79% and 16.90%YoY respectively- resulting in cumulative year-on-year growth.
“For 2021 our expectation for revenue growth is anchored on a more robust recovery of on-trade sales, which is responsible for almost 70% of total industry sales, as vaccination efforts in the country gather momentum.
“This should support alcohol volumes over 2021, which we forecast would come in higher, due mainly to a lower base from last year”, Meristem Securities explained.
Analysts at United Capital said based on their supply chain sources, INTBREW announced price increment across its products which took effect in Mar-2021.
Thus, the firm now expects revenue growth to come in strongly. “We estimate revenue growth of 28.4% year on year for 2021. However, we expect cost pressures to crystalise after a positive surprise in 2020”, United Capital stated.
INTBREW faces multiple pressures including the impact of devaluation on the Naira cost of imported barley amidst the rising cost of the commodity. coupled with sustained inflationary pressures on locally sourced materials will ramp cost pressures.
Analysts said they remain concerned by the company’s high operating leverage, compared to peers, due to huge operating expenses and depreciation overhead.
“Thus, while we project a decline in operating loss and after-tax losses, we do not see the company turning profitable in 2021”, United Capital stated.
The company’s gross margin improved 3.2% to 22.3% in line following a reduction in the company’s cost margin to 77% in the period.
For lack of upside potential, analysts at United Capital have guided investors to stay neutral on International Breweries Plc. (Ticker: IntBrew) though the company’s sales rebound.
In its 2020 financial result, revenue jumped by 3.4% year on year to N136.8 billion, as strong revenue recovery in H2-2020 pulled sales numbers higher, reflecting the impacts of reduced restrictions on on-trade channels and social activities.
Though topline performance rebounds, the company’s huge operating leverage continues to weigh on performance, denting improvement in capital structure.
So, INTBREW loss before and after-tax reduced to N20.2 billion and N12.1 billion respectively in the year. Earlier in H1- 2020, INTBREW’s revenue had declined 11.7% as Covid-linked pressures pushed beer volumes lower, particularly in Q2-2020.
However, analysts explained that gradual easing of restrictions on movement and social gatherings resuscitated demand as revenue grew 19.5% year on year in H2- 2020.
Surprise decline in Cost of Sales
United Capital spotted what analysts call a surprise decline in costs of sales in 2020, down 0.8% year on year to N106.3 billion from N107.1 billion in 2019.
It was noted that the decline in cost of sales was broadly supported by a 5.6% year on year drop in the cost of raw materials, which analyst considered as a positive surprise considering the impact of devaluation on Naira cost of imported barley as well as inflationary pressures on key materials like Packaging materials, Cassava, etc.
Following the decline in cost of sales, compared to growth in revenue, the company’s gross margin strengthened, jumped 330 basis points to 22.3% in 2020.
Similarly, gross profit grew 20.9% year on year to N30.5 billion from N25.2 billion in 2019.
Limited commercial activities curtails OPEX
In 2020, the outbreak of the covid-19 pandemic limited the ability of many corporates to engage in usual commercial promotions. This applied to INTBREW who was unable to organize several of its annual commercial promotional activities.
This reflects in the 23.7% year-on-year decline in advertising and promotion expenses. Overall, this supported the 20.7% drop in marketing and promotion expenses to N12.7 billion from N16.0 billion in 2019.
On the other hand, administrative expenses expanded 6.7% to N27.9 billion in 2020 as overall core operating expenses declined 3.7%.
United Capital said on a negative note, the company recorded other losses of N14.4 billion as against N1.7 billion in 2019.
Analysts noted the surge in other losses was driven by net foreign exchange loss of N10.0 billion as well as loss on disposal of property, plant, and equipment (PPE) worth N4.4 billion in 2020.
In addition, it was spotted in its financial statement that INTBREW booked impairment charges worth N1.4 billion. These margin dilutive development weighed on operating performance as the company recorded a 10.5% year-on-year increase in operating loss.
The company’s financials showed operating loss printed at N23.2 billion 2020 from N21.0 billion in 2019.
Capital restructuring exercise bears fruit
Amidst efforts to stem negative earnings, the management efforts to restructure bears fruits in the pandemic years, analysts explained.
United Capital stated that following completion of the N164.4 billion right issue in December 2019, International Breweries used the proceeds from the issuance to pay down some of its loans in 2020.
As a result, total borrowings declined 58.0% year on year to N110.7 billion at the end of 2020 compared to N263.6 billion as at 2019.
Analysts said the decline in borrowings fed into lower finance cost which shed 79.1% year on year to N3.2 billion from N15.2 billion in 2019.
The right issue proceeds also bolstered the company’s cash position as cash and cash equivalents grew 113.3% amidst improved working capital management.
As a result of turning cash positive, finance income surged to N1.5 billion compared to just N1.8 million in 2019.
Overall, the company’s net interest expense fell 89.0% year on year to N1.7 billion from N15.2 billion in the comparable period in 2019.
Analysts remarked that following the steep decline in net interest expense, loss before tax and loss after tax fell 31.2% and 55.5% respectively to N24.9 billion and N12.4 billion, from N36.2 billion and N27.8 billion.
Following upward revisions to the sales forecast and lower loss estimates, United Capital analysts raise the target price on INTBREW to N5.88/s from N4.75/s with a hold rating on the stock.
International Breweries Records N44 Billion Loss in 3-Year
After adjusting for net debt of N59.86 billion, Meristem sets target price of N5.51 for the ticker, thus recommend a HOLD.
INTBREW: Loss-Making Streaks Pose Big Threat to Survival
