Virus Outbreak Exacerbates International Breweries Earnings Trouble

Virus Outbreak Exacerbates International Breweries Earnings Trouble

 International Breweries Plc achieved a rather worsen financial scorecard in the first half of 2020, thanks to virus outbreak that exacerbate an already pressured earnings performance.

Equity analysts have set price target of ₦10.05 for International Breweries Plc stock after a rather disappointing earnings.

Despite its high cash burn rate, and resultant loss of earnings, shareholders pumped money into the company as equity value skyrocketed by a whopping 1,934%.

Valued at ₦89.987 billion in the stock market, IntBrew was quoted at ₦3.40 which was 5 kobo above its bottomed price, against 52-week high of ₦12.60.

Due to pressure on demand, sales dropped by about 25% in the first half of 2020 to ₦60.614 billion compare to ₦68.631 billion in the comparable period in 2019.

This led to about 37% increase in IntBrew after tax loss. Loss for the first half of 2020 widened to ₦9.357 billion from ₦6.841 billion a year earlier.

MarketForces review of the brewer’s financials shows that cost to sales ratio was heavy on IntBrew, thus margin was thin.

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As a result, gross profit was unable to cover the company’s operating expenses, thus resulted to loss – albeit sustained year on year.

Chapel Hill Denham said the firm’s investment view on IntBrew is long-term as the stock trades at enterprise value to earnings before interest, tax, depreciation and amortisation (EV/EBITDA) of 21.6x, compared to emerging market and global peer’s average of 11.9x.

COVID-19 increased competition risk in the beer market, survival depends solely on brand affinity. International Breweries Plc, a key challenger in the beer market seems to be having rough time standing.

Turnover has been on decline, and there seems to be bumps to becoming profitable.

IntBrew has published its unaudited H1-20 results which showed that sales dropped about 25% year on year.

Chapel Hill Denham equity analysts note shows that annualized earnings per share (EPS) worsened to -₦0.70 in H1-20 from -₦0.51 in H1-19.

“This is worse than our projected estimate of -₦0.57, but in line with consensus estimate of –₦0.76 kobo, equity analysts at Chapel Hill Denham stated.

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Analysts said they believe the significantly softer outturn in turnover in Q2-20, which dropped by 24.7% to ₦25.27 billion, drove the EPS decline.

“We have a BUY rating on IntBrew, with a 12-month target price of ₦10.05@, analysts stated.

Explaining positive side of the brewer’s performance, Chapel Hill Denham said weaker production activity induces costs of sales reduction.

“Like other brewers in Nigeria, we suspect that the restriction in on-channel consumption (social events, social clubs and bars), slowed demand for products.

“This led to a weaker production and a corresponding decline in costs of production.

“Nonetheless, we note that the decline in costs of sales (-21.2% yoy) is slower than the decline in turnover (-24.7%), implying cost inefficiency, in our view.

The brewer’s operating expenses (OPEX) slumped by 19.2% year on year to ₦7.42 billion, for the second consecutive quarter, after declining by 2.8% in Q1-20.

Analysts said this was largely due to a fall in administrative expenses and marketing & promotion expenses by 4.4% and 50.3% respectively to ₦5.94 billion and ₦1.47 billion.

Notably, IntBrew recorded a net foreign exchange loss (unrealised) of ₦1.57 billion and a derivative gain of ₦1.86 billion.

Debt repayment via a rights issue supported the 33.4% decline in finance cost to ₦1.30 billion. The company utilised its rights issue proceeds to offset ₦164.53 billion in debt in Q1-20.Virus Outbreak Exacerbates International Breweries Earnings Trouble

Accordingly, gross debt was down by 59.2% year to date to ₦107.59 billion from ₦263.64 billion in financial year 2019.

Chapel Hill Denham said the current loan balance is a US$278 million term loan, obtained in 2018 with maturity date of May 2021.

The company has entered into non-deliverable forward contracts to mitigate the forex risk on the contractual interest and principal repayments.

Analysts at Chapel Hill Denham are concerned about IntBrew’s turnover which fell by 24.7% to ₦25.27 billion in Q2-20.

“We believe this reflects the impact of movement restrictions on volume amid muted price increase in February 2020 after Nigerian Breweries Plc and Guinness Nigeria Plc raised prices”, analysts stated.

Meanwhile, the company’s revenue declined by 28.5% quarter on quarter, thus reflecting a weaker Q2-20 when the lockdown was highly pervasive.

“We note that IntBrew will not be impacted by the additional increase in excise duty on spirits (to ₦200/litre), as it has a portfolio that is dominated by lager brands. Excise duty will remain at ₦35/litre (same as June 2019)”, analysts explained.

IntBrew’s net operating cash flow (NOCF) weakened to ₦9.15 billion from ₦34.08 billion. This signify pressure on the company’s ability to generate funds to cover its investing activities.

Chapel Hill Denham however attribute the decline to weak working capital management as trade and other payables fell by 9.5% year to date to ₦79.81 billion.

Meanwhile inventories rose by 1.8% in the first half to ₦22.38 billion amid 23.0% year to date decline in trade & other receivables.

Cash and cash equivalents were somewhat flat at ₦31.63 billion, having dropped marginal at 0.6% year to date.

The brewer’s slowed down its investing activities as net capital expenditure (CAPEX) dropped to ₦6.30 billion, which resulted to capex intensity of 10.4% in H1-20 from 27.4% in H1-19.

Virus Outbreak Exacerbates International Breweries Earnings Trouble


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