International Breweries: Earnings outlook improves

International Breweries recorded an accelerated growth in earnings in its third quarter ended December 2015 and that has changed the full year earnings prospects for the brewing company. The company has been growing revenue and losing profit in the past two years but the strong third quarter performance is indicating a change in the trend in the current financial year ending March 2016. 

Sales revenue has been growing moderately and a stable growth is expected to be maintained this year. The slow growth in sales is a reflection of the declining total brewed products market. The ability to improve profit capacity despite moderately improving sales revenue is the major accomplishment in the third quarter that has changed the company’s performance outlook for the financial year.

At N16.46 billion, sales revenue stepped up from flat growth in the second quarter to a moderate growth of 7.5% year-on-year at the end of the third quarter. Further acceleration is expected in the final quarter and the company is expected to close the financial year at the end of March with a turnover of a little under N23 billion. This will push up sales revenue growth to over 10% at full year, still below the 12% increase in the preceding year.

There is a big turnaround in profit performance of the company from a drop of 48.2% year-on-year in the second quarter to an increase of 18% at the end of the third quarter. The company posted an after tax profit of N1.71 billion at the end of the third quarter, a big leap forward from the N0.7 billion profit it reported at the end of the second quarter. This means it earned over N1 billion or 59% of the profit in the third quarter – a development that looks very much like a windfall.

Based on the accelerated growth in the third quarter, profit is expected to approach its previous peak three years ago. After tax profit is projected at N2.32 billion for International Breweries at the end of the current financial year.  That will be an increase of 19% over the net profit of N1.95 billion the company posted in the 2015 financial year.

More importantly, it will be a reversal of a two-year falling profit since the peak profit figure of N2.33 the company reported in the 2011/12 financial year. The company closed the last financial year with the lowest profit figure in three years.

Improved profit capacity in the third quarter is a result of both the accelerated growth in sales revenue and a moderated cost behavior during the period. Cost of sales increased less rapidly than sales revenue, which improved gross profit margin from 49% in the same period last year to 50.4% at the end of the third quarter. Much of the saving from cost of sales was however claimed by a rise of 16.3% in marketing and administrative expenses. Another adverse development came from other losses of N169 million in place of other gains of N129 million in the corresponding period last year.

An exceptional growth in finance income from N1.3 million to N222 million over the review period moderated the impacts of the cost increase and other losses that occurred. The favourable impact on the income statement was further reinforced by close to 10% decline in finance charges and a drop of 12.7% in tax expenses. The company was therefore able to reclaim significant revenues claimed by finance expenses in the second quarter.

The drop in finance charges is despite an increase in balance sheet borrowings. Short-term debts have jumped by over 693% to N4.60 billion year-on-year at the end of the third quarter, more than countering a drop of about 38% in long-term borrowings to N4.86 billion.

The overall favourable cost behavior in the third quarter has raised the company’s profit capacity. Profit margin has improved from 9.5% in the same period last year to 10.4% at the end of the third quarter. This has reversed a drop in net profit margin in the second quarter from 13.5% in the same period in the preceding financial year.

The company earned 52 kobo per share at the end of the third quarter, up from 44 kobo in the same period in the preceding financial year. Earnings per share is expected to amount to 70 kobo for International Breweries at full year. This will be an improvement from 59 kobo per share in the preceding year. The company paid a cash dividend of 32 kobo per share for the prior financial year.