Profit Drops, but NB Plc.’s Result Shows Recovery is Underway
In its 9-month of financial year result, Nigerian Breweries Plc.’s profit after tax went south by 43.5% from ₦12.275 billion to ₦6.940 billion.
Despite this disappointing profit, analysts said the brewer’s third quarter result indicates that strong recovery may be underway as demand picked up strongly.
To maintain its dividend policy, NB Plc however announced an interim dividend of 25 kobo per share, which will be paid electronically in December 1, 2020.
But data shows that NB Plc share movement has largely under-performed year to date return in the stock market, though its parent company acquired more of the company’s share in the third quarter.
Detail of the unaudited result showed that NB’s net revenue slipped 0.7% from ₦235.659 billion in 9M-2019 to ₦234.039 billion a year after.
This helped the company to deliver strong earnings recovery in Q3-2020 as global easing of economic lockdowns, thus opening up sales channels for alcoholic and non-alcoholics drinks.
In Q3:2020 alone, NB Plc net revenue rose about 20% from ₦68.652 billion in Q2 to ₦82.229 billion, the performance which indicate a strong recovery to pre-pandemic level.
So, profit after tax expanded significantly by 1,508% from ₦84 million in Q2-2020 to ₦1.35 billion in Q3-2020.
Analysts see this as an indication of strong recovery around demand for the company’s products, though there was a marginal drop in net revenue in 9M-2020.
Beyond what the company or its management can control, NB Plc has been faced with lower demand as a result of COVID-19 restriction.
In its equity note, CSL Stockbrokers also alluded to removal of covid-19 restrictions on gatherings and re-opening of on-trade channels (clubs, bars etc.) t o have helped the results.
The uptick performance came as surprise as analysts at CSL Stockbrokers said traditionally Q3:2020 results has always been a weak period for sales for the company.
In its estimate, CSL Stockbrokers Limited said NB Plc annualised 9M-2020 revenue is ahead of its 2020 projection of ₦277.5 billion.
But then, the firm saw cost of sales (adjusted for depreciation) expanded faster than revenue, up 1.6% to ₦125.0 billion from ₦123.1 billion in 9M-2019.
“We note that on a quarter on quarter basis, cost of sales adjusted for depreciation, grew 17.0%, below Q3 2020 revenue growth”, CSL Stockbrokers stated.
Thus, analysts think NB Plc. is finally enjoying the benefits of weaker commodity prices in the international market despite elevated pressures from the recent spate of naira devaluation.
The investment firm also noted that excise payments per hl is now flat on a year on year basis in Q3:2020.
Consequently, Q3-2020 gross profit grew 23.3% quarter on quarter to ₦37.6 billion from ₦30.5 billion in Q2-2020.
This was a bit different from what the company delivered in its 9M-2020 result when gross profit declined by 3.2% to ₦109 billion from ₦112.6 billion in 9M-2019.
Then, as expected gross margin came lower by 1.2 percentage points year on year to 46.6% but Q3: 2020 gross margin strengthened by 1.3 percentage points.
Over all, in the period, the brewer was able to keep operating expenses under control.
Its operating expenses (adjusted for depreciation) declined 7.7% year on year to ₦58.8 billion in 9M-2020 from ₦63.7 billion in the comparable period.
Commenting in this, analysts said the decline in operating expenses was driven by lower marketing & distribution expenses which has been adjusted for depreciation.
Specifically, marketing and distribution expenses was down 10.7% year on year to ₦48.4 billion, which more than offset the 8.9% uptick in administrative expenses as adjusted for depreciation.
As a result, earnings before interest tax depreciation and amortisation (EBITDA) rose 2.7% year on year to ₦50.2 billion in 9M 2020 from ₦48.9bn in 9M:2019.
Meanwhile, EBITDA margin strengthened by 0.7 percentage point to settle at 21.4% in 9M:2020.
But depreciation and amortisation was higher by 15.5% year on year to ₦28.3 billion in 9M-2020 from ₦24.5 billion in 9M-2019.
CSL Stockbrokers stated that this actually exerted some downward pressure on operating profit when compare 9M-2020 with the comparable period in 2019.
So, due to largely hostile economic environment, NB Plc.’s operating profit slowed down 10.2% year on year to ₦21.9 billion in 9M-2020 from ₦24.4 billion in the comparable year.
However, due to recovery and some normalisation in the operating environment, NB Plc.’s operating profit was up 80.7% quarter on quarter to ₦7.2 billion in Q3-2020.
On the financing side, analysts expressed concern over the company’s net finance cost that expanded significantly, noting that this was driven by increased short term debt.
For context, analysts explained that bank overdraft and short term loans surged by 161.6% year on year in 9M-2020 as against 85.1% year on year as at H1-2020.
As a result, NB Plc net finance cost rose 44.8% year on year to ₦11.5 billion in 9M-2020 from ₦8.0 billion in the comparable year.
The surge was driven by the 43.4% year on year growth in finance cost to ₦11.7 billion in 9M- 2020 while finance income declined 5.3% to N0.2 billion.
The surge in finance cost was driven by interest payments on commercial papers, analysts said.
“We noted that the company issued commercial papers worth ₦85.8 billion on its balance sheet as at 9M-2020 as against ₦29.6 billion a year earlier”, CSL Stockbrokers stated.
The firm explained that the decline in finance income however reflects the ongoing depressed yield environment despite strong cash generation in 9M-2020.
In spite of its recorded higher receivables, NB Plc.’s boasts a healthy cash balance of N53.7 billion buoyed by proceeds from loans and borrowing as well as earnings pass-through to net operating cash.
In actual fact, cash balance rose to ₦132.3 billion from ₦120.1 billion at the beginning of the year. Though NB’s investment in plant and equipment marginally declined 2.7% as at 9M-2020.
In an equity note, CardinalStone said NB may be looking to ramp up capacity in the near term as capital expenditure commitments for property, plant and equipment amounted to ₦60 billion at the end of the quarter.
Meanwhile, the company’s profitability level was further impacted by higher effective tax rate which rose 8.1 percentage points to 36.8% year on year in 9M-2020.
The company’s unaudited financial statement showed that NB Plc tax expense inched up 18.4% to ₦4.0 billion in the period.
CSL Stockbrokers said the confluence of weaker revenue, high financial leverage, and elevated tax weakened profitability.
Earnings per share dropped to ₦0.87 from ₦1.53 per share in 9M-2019 as NB Plc suffered from multiple issues in operating environment in 2020.
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