NB Plc: Dividend Aristocrat’s Revenue Miss Estimates Despite Price Raise
Nigerian Breweries Plc, a leading brewer with significant market share, raised it beers prices, but earnings still underperformed consensus analysts’ estimates for the financial year 2019.
The demand curve pointed at the fact that great taste seems not to impress consumers’ profiles whose wallets dictate their purchasing patterns in the recent time.
Inflation has been strong, averaged 11.4% for year 2019 and that affected a number of household purchasing power in a way.
Beyond great taste, scale of preference and availability of substitutes have become an important factor in purchasing and beers market has not been left out.
With the pricing strategy, NB Plc was able to recover from weak revenue due to price raise though, it still remains less profitable.
Meanwhile, at N51.50 to a share, NB market capitalisation was N411.84 billion on 7,996,902,051 shares listed on the main board of the Nigerian Stock Exchange.
Earnings per ordinary shares receded, dropped off to N2.01 as against N2.43 in the corresponding period in 2018.
NB Plc as one of the dividend aristocrats however booked to pay investors who have been strongly starved with price appreciation N1.51 dividend per share.
Analysts called 100% dividend payouts an incredible move that would compensate investors for going long with company.
Financial performance in 2019
Recently, the Brewer released its financial year 2019 result where it reported a 0.4% year on year decline in revenue to N323 billion.
Compare with financial year 2018 when its sales had berthed at N324.4 billion.
While NB Plc revenue contracted, International Breweries Plc reported 10% increase in net revenue in the same period. Rivalry in the beer market among key industry players has been strong.
This has been the situation despite the fact that there has been heavy increase in excise duty payment often charge directly against gross revenue of brewers.
Before now, the pressure from the market due to lower purchasing power of consumers made it difficult for brewers to increase prices.
But earnings have been slowing, and once NB Plc raise price. That singular decision to stay afloat cost the company its market share.
It had to reversed itself but again it has become obvious price adjustment is needed. While its cash and cash equivalent dropped by more than 57%, it increased borrowing by 38%.
In 2019, cash position dropped to N6.4 billion as against N14.8 billion a year earlier. The same time, cash needs for operations push borrowing from N42.6 billion in 2018 to N55.7 billion.
This raised debt to equity ratio to 33.2% compare with 25.5% in the previous year. This means that NB Plc used N33.2 in 2019 as against N25.5 on every N100 assets it employed in 2019.
NB’s total assets contracted by 1.4% to N382.8 billion as against N388.3 billion carried forward into the year.
Total equity or shareholders fund however received a nudge, up marginally to N167.7 billion from N166.8 billion.
Tracked performance revealed that an increased competition in the industry ensued with activities of InBrev, Golden Guinea and aggressive marketing from key competitors that have been playing regional card to cut from customers’ wallets.
However, in the fourth quarter of 2019 revenue was higher by 1.2% year on year to N87.3 billion from N86.3 billion in the comparable period in 2018.
Analysts at FSDH note that the improvement in the fourth quarter of 2019 revenue came on the back of a recent price increase implemented by the company in November.
This helped reduce the impact of higher excise duties.
“We also note that the company did not report its excise duty payments as it typically did in prior quarterly numbers, which thus limits ability to measure the impact of fourth quarter 2019 excise payments.
“Then, we note that seasonal impacts of higher activities during the festive period drove quarter on quarter growth of 19.3% in revenue for the fourth quarter”, analysts at FSDH stated.
A further dive into the number shows that gross margin recovers on lower raw material cost.
As noted in its third quarter review, analysts continued to observe a decline in cost of sales for NB in the fourth quarter of 2019, with fourth quarter cost of sales declining 3.5% despite the 1.2% uptick in revenue.
Consequently, financial year 2019 cost of sales declined 2.9% year on year to N191.8 billion, from N197.5 billion in 2018.
FSDH analysts say they see two main factors responsible for the decline in cost of sales.
First, lower barley prices during the last half of the year, which is reflected in the 4.1% decline in raw materials & consumables cost.
Also noted is the growth in revenue which was primarily price driven, rather than volume driven, given the company raised prices to distributors in the fourth quarter.
Against this backdrop, gross margin strengthened by 1.5 percentage points to 40.6% in 2019, from 39.1% in financial year 2018.
In a synchronized manner, gross profit climbed 3.4% to N131.3 billion in 2019, from N126.9 billion in 2019.
Then, the Brewer operating profit was pressured by higher marketing costs. In the period, operating expenses climbed higher by 6.8% to N97.1 billion in 2019, from N90.8 billion.
The record rise in operating expenses was driven by 10.9% rise in marketing & distribution expenses, due to a 21.7% climb in advertising expenses, as Nigerian Breweries continued to attempt reclaiming lost market share.
On the other hand, administrative expenses declined 6.9% year on year in the financial year 2019, due to the reduction in personnel expenses following the right-sizing exercise done last year.
Consequently, operating profit edged lower by 4.7% to N35.2 billion in 2019, from N37.0 billion in FY 2018, while operating margin fell 0.5 percentage point year on year to 10.9%.
Higher leverage pressures performance
The NB Plc engaged in borrowing to shore up cash position and manage working capital strategy in the period.
In its financials for 2019, NB Plc net finance cost jumped 57.4% to N11.9 billion, from N7.5 billion in the comparable period in 2018.
This came on the back of lower interest income which slow down 28.0% to N0.3 billion and higher interest expense up 53.5% to N12.1 billion.
NB’s higher interest expense was driven by higher interest bearing liabilities which went up 30.8% to N55.7 billion due to the recent commercial paper issuances done by the company to finance working capital.
“We note, the company has paid down its commercial paper debt upon maturity, evidenced in the reduction in interest bearing liabilities from N72.8 billion as at 9-month 2019”, analysts at FSDH said.
While tax expense declined 27.4% to N7.2 billion, net income slumped 17.1% to N16.1 billion in financial year 2019 when compare against N19.4 billion in the comparable period in 2018.
Earnings per share printed at N2.01 for 2019 compare with N2.43 in financial year 2018. However, it declares final dividend…with a 100% payout.
The company declared a final dividend of N1.51 per share, which translates to a dividend yield of 2.9%, based on the closing price of N51.50/share as at 20th Feb, 2020.
Analysts noted the company paid interim dividend of N0.50 per share in the third quarter, which implies a 100% payout for 2019, factoring in the N1.51 to a share declared as final dividend.
FSDH analysts view the brewer performance as turning a corner but banana peels still ahead.
“We think the company is finally turning a corner with recent a price increase to distributors.
“However, we expect the implementation of the last phase of the ad valorem excise regime will begin to pressure performance from the second half of 2020, serving as a potential banana peel ahead”, FSDH projected.
NB Plc: Dividend Aristocrat’s Revenue Miss Estimates Despite Price Raise