International Breweries Moves Close to Profitability, Cuts Loss by Half

International Breweries Moves Close to Profitability, Cuts Loss by Half

International Breweries (Ticker: IntBrew) moves close to profitability as the company cuts its loss after tax by half in the first quarter (Q1) of 2021 following double-digit revenue growth of 10% year on year to N38.96 billion from N35.35 billion in Q1-2020 driven by improved sales volume.

The loss reduction achieved came as a result of better cost management in the period in addition to a bright hedging strategy that yielded positive on its foreign exchange management exposures. Over the years, the low-price brewer has been sustaining losses due to its strong market penetration efforts.

For example, International Breweries recorded another N2.240 billion loss after tax in Q1 of 2018. The loss extended to N3.988 billion a year after. In Q1-2020, its loss after tax printed at N5.646 billion

In an equity report, WSTC Securities said it expects that the company’s revenue growth would be sustained in the short to medium term, premised on increased sales volume.

International Breweries Moves Close to Profitability, Cuts Loss by Half

“We posit that the sustained economic recovery would drive the increase in sales volume. We also expect to see sustained cost optimisation in a bid to protect earnings margins”, WSTC Securities projected. .

Equity analysts at the firm revised their estimate on International Breweries to N4.80 from N4.69 as fair value for the stock. The fair value estimate for the company’s stock put investors holding the stock on negative total return or upside, which warranted a hold rating from analysts.

International Breweries Plc.’s cost of sales jumped by 11% year on year to N32.48 billion in Q1-2021 from N29.18 billion a year ago amidst inflationary pressure that impacted material input across the manufacturing space.  

Due to the rise in cost of sales, the brewer’s gross profit grew at a slower rate of 5% to N6.49 billion in Q1 2021 from N6.17 billion in the comparable period in 2020.

Analysts at WSTC Securities said the company’s operating loss in Q1-2021 stood at N2.49 billion representing a 4% increase from a N2.39 billion operating loss reported in the comparable period in 2020.

However, loss before tax improved by 54% to N3.56 billion in Q1-2021 from N7.69 billion in Q1-2020 due to a decline in both finance cost and other losses.

Likewise, analysts said loss after tax improved by 54% to N2.58 billion in Q1 2021 from N5.65 billion in Q1 2020.

Amortisation of Container Bloats Cost of Sales

Equity analysts at express view that the double-digit cost of sales growth recorded in Q1-2021 resulted from an increase in sales volumes, as cost margin remained flat at 83%, same as reported figure a year ago.

During the quarter, analysts said the company incurred a higher amortisation charge of containers. The amortisation charge relates to returnable containers, where provisions were made for breakages and losses in trade over the expected useful life of the container.

Specifically, the amortisation charge rose by 117% year on year to N4.56 billion in Q1-2021 from N2.10 billion in Q1 2020.

“If we discounted the amortisation charge as a one-off expense, the cost of sales could have risen by just 3% year on year to N27.92 billion in Q1-2021 from N27.08 billion in the comparable period in 2020.

Nevertheless, gross profit grew by 5% year on year to N6.49 billion in Q1-2021 from N6.17 billion in Q1 -2020.

Macroeconomic Challenges Reflects in Operating Expense

According to WSTC Securities, Nigeria’s economic challenges reflects in International Breweries operating expense which jumped by 5% year on year to N8.98 billion in Q1 2021 from N8.56 billion in Q1-2020.

Analysts said the higher operating expense was driven by a 14% hike in business running cost to N2.04 billion from N1.80 billion in Q1-2020.

“We attribute the hike in business running cost to increased inflationary pressures”, analysts added.

It was noted that the higher operating expense resulted in a 4% year on year rise in operating loss to N2.49 billion in Q1-2021.

Deleveraging Effort amid Better FX Management Helps Loss Position

On a positive note, International Breweries effort at deleveraging balance sheet appears to have started to yield result. The Company’s loss before tax improved by 54% to N3.56 billion in Q1-2021 from a loss of N7.69 billion in Q1-2020.

The improved loss position was driven by a decline in finance cost and other losses.

Finance cost dipped 30% to N684 million in Q1-2021 from N984 million in Q1-2020. WSTC said the lower finance cost underpinned the management’s deleveraging efforts through a capital raise in January 2020.

Also, other losses declined significantly by 97% to N168 million from N5.64 billion recorded against its income statement in Q1-2020.

WSTC Securities noted that the company’s realised net foreign exchange loss improved to N301 million in from N4.69 billion in Q1-2020 while unrealised net foreign exchange gain improved to N81 million in Q1 2021 from a loss of N5.25 billion in Q1-2020.

“We believe that the Company hedged better within the period. Therefore, the combination of lower finance cost and improved other losses resulted in the improved loss before tax to N3.56 billion in from N7.69 billion in Q1-2020”, analysts explained.

International Breweries Moves Close to Profitability, Cuts Loss by Half

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