Nigerian Breweries: Accelerating on the downside

Nigerian Breweries Plc is losing sales revenue and profit for the third year in a row and the downslide has continued to gain speed so far this year.

The economic lockdown has reinforced a shrinking consumer market for brewed products. A drop of 17 percent in profit at the end of 2019 accelerated to 31 percent in the first quarter and yet further to 58 percent at half-year ended June 2020.

The brewing company closed last year’s operations with the lowest profit figure in more than a decade at N16 billion and yet the highest profit drop in years is in process in the current year. Second-quarter operations ended one step away from a loss with profit dropping by more than 98 percent to N84 million quarter-on-quarter.

That was all the company added to the first quarter closing profit of N5.5 billion to close the half-year at N5.59 billion. Costs aren’t coming down with sales revenue and finance expenses rather steered a rampaging growth at 58 percent quarter-on-quarter at the end of June 2020.

At the centre of the company’s challenges is dropping sales revenue, which has been going down since 2018. Costs keep moving up generally or at best sticky while the company keeps losing sales revenue. The development has slashed margins across the board, which has sustained profit drops at all levels of the income-expenditure flow.

Two major developments from the cost angle explain the company’s bad report sheet for the second quarter. The first is input cost, which shifted from flat together with sales revenue in the first quarter to declining well below sales in the second quarter.

The other is finance cost, which also shifted from flat to a 58 percent growth across the quarters. The company’s debt profile has multiplied two and half times from N56 billion at the end of 2019 to over N139 billion at the end of half-year in June 2020.

The hopes for regaining operating momentum seen in the first quarter faded in the second quarter that was ruled by the coronavirus induced economic lockdown. There had been a build-up from a loss of over N1 billion in the third quarter of 2019 to a profit of N4.8 billion in the final quarter and further to N5.5 billion in the first quarter of 2020. A disappointing second quarter has put an end to the gain in momentum.

The second half of the year is laced with a great deal of uncertainty for the company in the reflection of both the general economic constraints and lingering industry issues. Profit performance is uneven across quarters for Nigerian Breweries and even without the economic lockdown effect last year, the second half contributed only a net of N2.8 billion to the full-year profit figure of N16 billion.

That leaves the company in the region of high investment risk – the high prospects that actual earnings would be significantly different from the expected. Brewing companies are at the receiving end of Nigeria’s weak consumer spending capacity and they have been there for some years now. Performance of companies from this sector can be expected to be among the worst this year in reflection of the effects of the coronavirus pandemic.

Sales revenue extended from flat in the first quarter to 11 percent drop at half-year. Profit dropped by 31 percent on flat revenue in the first quarter and dropped more than five times ahead of revenue at half-year. All the cost lines of the company claimed increased proportions of sales revenue, as they either increased or declined less rapidly than sales year-on-year.

Nigerian Breweries closed half year operations with net sales revenue down by roughly 11 percent year-on-year to N151.8 billion. The company had lost sales revenue for the second year in 2019 and the half-year position this year points to the highest revenue drop in years. The company’s profit capacity flattened in the second quarter from N5.5 billion in the first quarter to N84 million in the second. Half-year, therefore, closed with an after-tax profit of N5.59 billion, which is a drop of 58 percent year-on-year. For the third year running, the company’s profit is downward headed and gaining speed on the run.

Last year, the company lost 17 percent of the preceding year’s profit and closed the year at N16 billion. An accelerating drop at the end of half-year points to a worse year in the making for the brewing company in 2020.

The outlook for the second half of the year indicates that sales revenue may strengthen up somewhat but profit would remain constrained in the face of choking costs. Strong steps may be required for management to prevent a loss position in the third quarter. Nigerian Breweries earned 71 kobo per share at the end of the half-year operations, down from N1.66 per share in the same period in 2019. The company earned N2.01 per share at the end of 2019 and paid it all out to shareholders in cash dividend.