International Breweries loses growth momentum

International Breweries lost its profit growth momentum in the third quarter and the full year earnings outlook for the company has moderated. Revenue growth remained quite good and the company is still on the way to a new peak in turnover in the current financial year ending March. Profit however dropped by almost a quarter year-on-year at the end of the third quarter in December. The hopes for an accelerated growth in profit have therefore faded and profit may be flat for the brewing company at full year.

Michael Daramola, the company’s managing director/chief executive officer, is making progress in defending and improving market share in the brewing business held by giants. His innovative growth strategies appear to be working in pushing sales volume and revenue in the face of a continuing slow growth in the brewed products market. However he could not keep operating costs from rising, which has eroded profit margin and led to the profit drop recorded in the third quarter.

The company grew sales revenue by 13% to N15.31 billion year-on-year at the end of its third quarter operations in December. This remains one of the strongest revenue improvements seen in the breweries sector during the period. The company also led sales revenue growth in the industry in the preceding year.

International Breweries has achieved a rapid growth in sales revenue in the past five years from about N930 million in 2009 to N18.49 billion in March 2014. This indicates a sustained gain in market share over the period and the ability to defend the market share so far. Sales revenue is expected to accelerate in the current year to a projected height of N22.3 billion. This will be an increase of 20.6%, accelerating from 6.3% in the preceding year. The industry leader, Nigerian Breweries, was unable to grow sales revenue in 2014.

The company is losing profit even as it is growing sales revenue, which is due to a sustaining loss of profit margin for the second year. After tax profit dropped by 24.4% to N1.36 billion year-on-year at the end of the third quarter against the 13% growth in turnover. Subject to a further drop in the final quarter, after tax profit is projected at N2.15 billion for International Breweries in the 2014/15 financial year. That will be a flat growth of 2.4% over the N2.1 billion net profit the company posted in the preceding year.

The company recorded a decline of about 10% in after tax profit in the 2014 financial year. With the slacken performance in the third quarter, a new peak in profit earlier expected isn’t likely this financial year. The markdown of profit forecast follows a loss of profit margin from 13.5% at the end of the second quarter to 9.5% in the third. This is also below the 11.4% net profit margin at the end of the 2014 financial year.

Despite the drop in profit margin, the company is well ahead of Guinness’s profit margin of 6.2% but well below Nigerian Breweries’ figure of 15.9% – all at the end of December 2014. Management has succeeded in maintaining profitable operations since the company returned to profit in 2010.

The loss of profit margin follows rising costs in three major areas – cost of sales,  marketing/administrative expenses and finance cost. Cost of sales grew ahead of sales revenue during the review period at over 17%. With that, gross profit grew at a slower pace than sales revenue at 9.4% during the period.

Marketing/ administrative expenses also grew ahead of sales revenue at almost 27% and therefore claimed an increased share of sales revenue during the period. Finance cost registered the biggest increase at 64.6% after dropping by about 43% in the second quarter. The increase reflects rising long-term debts, which more than doubled between the end of the preceding financial year and the end of the third quarter.

The company earned 44 kobo per share at the end of the third quarter, down from 58 kobo in the same period in the preceding year. Earnings per share is projected at 65 kobo for International Breweries at the end of the financial year. That will be virtually at par with the 64 kobo the company earned in 2014.