IntBrew Takes Pricing Advantage to Stem Losses
In the first quarter of the financial year 2022, fortune smiled on the challenger brewer, International Breweries Plc, as the company record its second quarterly profits after years of loss-making streaks.
Its previous negative earnings had triggered equity analysts’ downgrade of the company’s stock. On the Nigerian Exchange, International Breweries Plc traded at N7.90 with at 26.862 billion shares outstanding.
While competing on pricing, the brewer was hit by Covid-19 in 2020, thus there was a slowdown in its efforts to build market share strong enough to upturn its losses. Based on its past earnings records and trading activities, the company had struggled to deliver positive earnings in a market that is relatively dominated by Nigerian Breweries Plc.
The unaudited result showed International breweries reported 48% year on year growth in topline while the company saw a profit after tax of N0.7 billion compared with a N2.2 billion loss after tax in the first quarter of 2021.
The company’s gross profit jumped significantly through the rooftop to N19.954 billion in the first quarter of 2022, rising by 208% year on year from N6.485 billion in the first quarter of 2021.
In its equity research note, Vetiva Capital reckoned that this is the company’s second quarterly profit since the consolidation from a loss of N2.5 billion the previous year. The earnings beat attracts a buy rating and adjustment to the earnings forecast for 2022 due to positive signals that the company is on its way up.
Accordingly, equity analysts at Vetiva Capital set N6.58 as the target price and projected positive earnings for the financial year 2022. But the company share price has inched above the expected price level. International Breweries share appears to be overvalued, a position supported by stock screener site simply Wallstreet analysts consensus.
For the financial year 2022, the investment firm projected that International Breweries sales would settle at N220.30 billion, which is 11% above the previous estimate. The impressive net profit performance was underpinned by significant growth in the margin, as well as increased reported finance income, according to analysts. READ: IntBrew: Analysts Downgrade Stock after Unimpressive Results
Vetiva Capital explained that like its counterparts in the brewery industry, International Breweries in the past two quarters raised prices across its portfolio, which, added to its ramped-up volumes and pushed revenue 48% higher to N57.5 billion for the quarter.
The company’s bottom line improved despite the 35% year on year rise in admin and marketing expenses to N12.1 billion and a N4.0 billion jump in other expenses (from N0.1 billion in the comparable period in 2021. Increased operating overhead was lifted by net FX losses.
Despite the downside arising from higher operating expenses in the period, International Breweries’ earnings before interest and tax as well as operating margin improved considerably to N3.7 billion and 6% respectively.
This stood in stark contrast with a loss of N2.5 billion and an operating margin of -7% in the comparable period. The company’s net finance costs snowballed 176% year on year to N1.8 billion, subdued by a N1.5 billion rise in finance income; the company turned a profit, with pretax profit that printed at N1.9 billion.
In the first quarter of 2021, International Breweries had burnt value when it sustained a N3.2 billion Loss before tax. Vetiva Capital said in the equity report that despite the significant progress made, specifically on margins, the pressure points for International Breweries remain its FX exposure and financial leverage.
“Improving these would also be key to sustaining its nascent profitability”. However, analysts said with persisting challenges in sourcing FX and a still-high debt level, would continue to keep profit in check.
Overall, in line with the improved margin for the Q1 period, Vetiva Capital analysts have forecasted that the company’s profit after tax for the full year will print atN4.0 billion. Analysts also expect gross and operating margins at 32% and 4% respectively in the financial year 2022.
“Whilst the risks of shrinkage in margin remain –due to vulnerability of supply chain- our outlook for margins are stronger given current pricing levels”, Vetiva said. #IntBrew Takes Pricing Advantage to Stem Losses
