NB Plc: high finance cost, unfavourable policy hurt earnings
It is not as if men were dropping beers bottles, but myriad of issues including weak macroeconomic condition has lowered earnings capability of the Nigerian Breweries Plc (www.nbplc.com). Rival brewers are striving hard to attract customers using quality and pricing to gaining entrance.
Some segment of the economy is reacting positively to great beer taste from substitutes producers at cheaper price compare with NB Plc brands.
At market cap of N372 billion, NB Plc has lost 40.61% of its share price at the beginning of the year to date.
The stock traded at N46.50 on Friday, having peaked at N83.20 in the year before its lowest value down the line at N46. In January, NB share opened the floor at N85.50.
Now, FSDH said it has target price of N55 for NB stock, asked investors to hold the stock while WSTC placed less than N52 on the stock.
That aside, the brewers through its finance strategy inflicted high interest rate obligations coming from its commercial papers issuance, as analysts at FSDH observed.
FSDH revealed that net Finance cost jumped 51% year on year to N8 billion from N5.3 billion in the comparable period in2018.
This came on the back of lower interest income which slipped down by 4.2% to N0.2 billion and higher interest expense that surged 48.6% to N8.2 billion.
In its review, analysts at WSTC Securities stated that finance cost spiked by 49% year-on-year, from N5.51 billion in 9M’18 to N8.18 billion in 9M’19.
They attribute the increase in finance cost to 55% increase in average debt levels from N37.18 billion 9M’18 to N72.82 billion in 9M’19; resulting from an increase in overdraft facility by N28.14 billion.
FSDH said NB’s higher interest expense was driven by higher interest-bearing liabilities that went up 70.9% to N72.8 billion due to the recent Commercial Paper issuances done by the company to finance working capital.
In the recent time, NB Plc, the leading brewer, has been struggling to stay ahead of the curve as excise duties pressure mount on its scorecard.
The brewers result shows that proportion of revenues converted to profit weakened, as it burned significant amount, then sustain loss in the third quarter of financial year 2019 results.
Analysts at FSDH stated that margin are thinner, and then if impacted on profits.
The leading brewer company is also fighting to keep its market share, as competitors embarking on aggressive, guerrilla strategy to raise market share.
Analysts said that NB Plc third quarter earnings release is largely unimpressive, as the numbers came weak on the back of key changes in fundamentals.
To WSTC Securities limited, the Brewer’s third quarter earnings is not impressive, albeit relatively better despite the fact that is sustained loss in the period.
The numbers show that net earnings in the period stood at a loss of N1.04 billion relative to a loss of N3.65 billion in the comparable period in 2018.
Analysts are of the view that the reduced loss-making position stemmed from a 12% decline in cost of sales from N46.77 billion in 2018 to N40.97 billion a year after, thus resulted to a cost savings of N6 billion as net revenue remained flat at N65.40 billion in both periods.
In addition, NB Plc incurred higher operating expense which surged 6% from N22.74 billion to N24.17 billion in the third quarter of the year 2019.
The earnings dilutive position worsened with addition of higher finance costs that jerked up 142% from N1.19 billion to N2.89 billion 2019; the savings of N6 billion made from the cost of sales line was able to reduce the extent of losses incurred in the period.
WSTC analysts noted that on a standalone basis, following a lower cost of sales in the third quarter of 2019, gross profit increased by 32% year-on-year from N18.63 billion in 2018 to N24.52 billion.
Thus, the gross profit margin stood at 37%, which means 67% of the total revenue were an outflow credited to direct cost. Then, operating profit rose at N709.65 million, which implies a thinned operating margin of 1%.
Analysts at WSTC Securities reckoned that the wide disparity between a gross margin of 37% and an operating margin of 1% arose from higher operating expense during the period.
Operating expense margin stood at 29% in the period as against 26% in the third quarter of 2018, due to a 6% year-on-year increase in operating expense.
Consequent to a 140% increase in finance cost from N1.22 billion in the third quarter of 2018 to N2.93 billion a year after, profit before tax nosedived into the negative territory, posting a loss of N2.19 billion.
Looking at the top line, gross revenue from January 1, 2019, to September 30, 2019 grew slightly by 2% year-on-year. Macroeconomic condition has adversely affected consumers’ purchasing power, and competitors are also biting from the larger pie to survive.
The pressure became more pressing on the back of a 43% increase in excise duty expense from N16.93 billion in this period last year to N24.25 billion. This resulted to 1% decline in net revenue from N238.07 billion to N235.68 billion.
On the excise duty policy, the Federal Government approved an increase in excise duties on tobacco and alcoholic beverages which became effective on June 4, 2018. The policy was to be introduced in phases over three years from 2018 to 2020.
Analysts at WSTC Security reckoned that the sharp increase of 43% in excise duty was a combination of a low base in duties in the first half of the year (H1’18: N0.20 as against H1’19 N0.35).
This, in addition to higher excise duty in the third quarter of the year (Q3’18: N0.30 compare to Q3’19: N0.35), as the excise duty became effective on June 4, 2019.
Analysts agreed that impact of heightened competition and weak macroeconomic depress bottom-line. Although gross profit grew by 2% from N95.72 billion in 9M’18 to N96.17 billion in 9M’19.
Operating profit declined by 9% year-on-year from N27.74 billion in 9M’18 to N25.17 billion. The decline in operating profit was owing to a 12% increase in marketing and distribution expenses.
The rising competition in the breweries industry has prompted a rise in the sales and marketing expenses of the major players, in a bid to protect market share.
Notably, administrative expenses declined by 12% year-on-year from N16.18bn in 9M’18 to N14.23bn in 9M’19; it was not enough to offset the 12% increase in sales and marketing expenses.
The group generated lower cash flows from operating activities in 9M’19 on the back of weak macroeconomic fundamentals. Lower revenues relative to higher cost of operations dampened the cash flows from operations, in which the Company had to drawdown overdraft facilities to support operations.
Consequently, profit before tax fell by 23% year-on-year from N22.48 billon in 9M’18 to N17.22 billion in 9M’19; while profit after tax fell by 17% year-on-year from N14.79 billion in 9M’18 to N12.23 billion in 9M’19.
Our View WSTC Securities analysts have revised our FY’19 EPS estimate from N1.62 to N1.73, following a better Q3’19 performance. The Company incurred a lower-than-expected finance cost in Q3’19. WSTC had estimated N3.13 billion but actual cost was N2.93 billion.
Analysts noted that the major bottlenecks that dragged the performance of Nigerian Breweries in 9M’19 were higher excise duties, higher marketing expenses and higher finance costs.
They expect the impact of increased excise duties to normalize in FY’20, however, analysts at WSTC cut FY’20 to FY’23 earnings estimate factoring adverse macro environment (unfavourable payment terms, uncertain account receivables) and heightened competition in the industry.
Analysts at the Securities firm believe that the breweries industry is relatively fragmented, where no single player has enough influence to move the industry in a single direction.
As a result, we do not see the possibility of a price increase in the near to medium term, especially considering the weak purchasing power of consumers. We also think that the direction of prices in the industry will be based on the actions of other market players in the industry.
WSTC set NB at a fair value of N51.36, as it continues to see increased competition in the industry. Though we acknowledge that NB remains the market leader in the industry, we see the extent of leadership gap closing in the medium to long term.
The downward revision of our fair value from N73.55 to N51.36 reflects the dimmer outlook of earnings, dividends, and cash flows.
FSDH said: following the implementation of the second phase of the Ad Valorem excise regime, margins have grown significantly thinner, which is impacting on profits.
“While consumer pockets may be pressed, we believe Nigerian Breweries would have to raise beer prices in order to grow profitability.
“The loss-making position of the main competitor, International Breweries, may encourage NB to raise prices given IntBrew is expected to follow suit”, analysts at FSDH noted.