Nigerian Breweries heads for another profit drop

Nigerian Breweries is likely to report a drop in profit for the third year running, as its 2016 report is expected to reach the market in the next few weeks. The brewing company was unable to grow sales revenue strong enough to absorb rising costs in 2016. Major cost increases led by interest expenses eroded profit margin in the year.  

Cost of sales grew ahead of sales revenue and interest expenses came close to doubling year-on-year at the end of the third quarter. This was against a marginal increase in turnover and a drop in finance income. Other cost lines failed to moderate and the company, which began to lose profit in 2014, looks set to show the lowest profit figure in many years from its last year’s trading.

The company maintained moderate growth in sales volume as per its 2016 interims and the moderate improvement is expected at full year. A new peak in sales revenue is still expected but with a slowdown in the third quarter, the earlier growth projection has to be revised downward.

The company improved sales revenue by 3.6% year-on-year to N222.72 billion at the end of the third quarter. Turnover growth is expected to step up in the final quarter with seasonal sales. The full year outlook indicates sales revenue in the region of N298 billion for Nigerian Breweries in 2016, a mark down from the initial projection of N318 billion. That will be a marginal increase of 1.4% over the sales revenue figure of about N294 billion the company reported in 2015.

Except for a moderate decline in 2014, Nigerian Breweries has grown sales revenue every year for the past five years. It improved turnover by 10.3% in 2015, the strongest revenue growth among the brewing majors.

Profit performance weakened further in the third quarter with the company converting only N1 billion out of its sales revenue of N65.34 for the three months period into profit. It therefore closed the third quarter operations with an after tax profit of N20.11 billion, inching up from N19.1 billion in the second quarter. It is a drop of 23.2% year-on-year and a sustained slowdown from the after tax profit of N10.45 billion in the first quarter. Net profit margin declined all the way from 13.5% in the first quarter to 12.1% in the second quarter and further to 9% in the third quarter – down from 12.2% in the third quarter of 2015.

The company’s profit outlook for the year dimmed further with the third quarter performance, dashing recovery hopes raised from the first quarter report. Based on the third quarter growth rate, after tax profit estimate for 2016 is revised from N38.8 billion to N28.4 billion for Nigerian Breweries at full year. That will be a drop of over 25% from the net profit figure of N38.06 billion the company posted at the end of 2015 and the lowest profit record in many years.

The company’s profit declined for the second year last year from the peak figure of N43.08 billion it reported in 2013. Seasonal sales in the final quarter may push up the profit figure above the estimate but a drop for the third year running is to be expected from the company’s 2016 operations.

The large drop in profit against a moderate improvement in sales revenue is explained by loss of profit margin due to cost increases. The main culprit is finance cost, which rose by 83% year-on-year to N10.5 billion at the end of the third quarter. The impact of that on the income statement was further extended by a drop of 39% in finance income over the same period. That caused net finance expenses to rise by over 95% and led to a drop of 26% in pre-tax profit. The company’s outstanding loans and borrowing have increased from a little over N19 billion at the end of 2015 to about N35.5 billion at the end of the third quarter.

Apart from finance expenses, cost of sales also encroached on sales revenue during the period, having grown by 10% – close to three times as fast as sales revenue. This means the net increase in sales revenue was far insufficient to meet the increase in cost of sales. That reduced gross profit margin from 47% to 43.7% over the review period. Despite tight controls on marketing/distribution expenses and administrative cost, operating profit still dropped by over 11% to about N38 billion.

The company shows a significantly improved cash flow position with a sharp drop in net cash utilized for investing activities and a draw down of fresh loan proceeds of N34.5 billion. These developments have shifted the company’s position from a net cash decrease of about N22 billion in the same period in 2015 to a net cash increase of over N18 billion at the end of the third quarter.

Earnings per share amounted to N2.54 at the end of the third quarter, down from N3.30 in the same period last year. The full year outlook indicates earnings per share of N3.58 for Nigerian Breweries at the end of 2016. It earned N5.62 per share in 2015 and gave shareholders a cash dividend of N3.60 per share.