Nigerian Breweries: Profit drops on rising interest expenses

Nigerian Breweries lost profit in the second quarter, as net interest expenses rose nearly three times over year-on-year at the end of June. Interest income fell by more than 51% over the period while interest cost grew by more than one and half times. Other cost lines failed to moderate and the brewing company therefore lost profit margin and therefore profit capacity weakened in the second quarter.

Product sales are moving relatively well and sales revenue accelerated in the second quarter. The company is sustaining growth in sales volume for the second year after it suffered a decline in 2014. A new peak in sales revenue is expected at the current growth rate at the end of the year, likely the strongest revenue growth to be expected among the operators in the slowing breweries industry.

The company closed the second quarter operations with an after tax profit of N19.07 billion, which is a drop of 11.2% year-on-year and a slowdown from the first quarter figure of N10.45 billion. It had grown after tax profit moderately at 3.5% in the first quarter. Net profit margin is down to 12.1% in the second quarter from 13.5% in the first quarter and from 14.2% in the same period last year.

The company’s profit outlook for the year has dimmed and the recovery hopes earlier raised from the first quarter performance have dimmed as well. Based on the second quarter growth rate, net profit is projected at N38.8 billion for Nigerian Breweries at full year. That will be a flat growth from the net profit figure of N38.06 billion the company posted at the end of 2015.

The company’s profit declined for the second year last year from the peak figure of N43.08 billion it reported in 2013. A major improvement in profit has not happened for the company over the past five years and that trend is again being sustained in the current financial year.

The company pushed up sales revenue by 3.8% year-on-year at the end of the second quarter, which is something to cheer in the breweries sector where the total market has continued to decline. A higher revenue figure was generated in the second quarter than in the first, which is a promising signal that the growth momentum could be stronger still in the second half of the year.

Based on the accelerating sales revenue, the company is expected to close the year with a turnover in the region of N318 billion in 2016. That will be an increase of 8.2% over the sales revenue figure of about N294 billion the company earned 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% last year, the strongest revenue growth among the brewing majors.

The drop in profit against an improvement in sales revenue in the second quarter is explained by cost increases that constricted profit margin. The main culprit is finance cost, which rose by 151.6% year-on-year to N8.39 billion at the end of the second quarter. The impact of that growth on the income statement was further extended by a drop of 51.6% in finance income over the same period. That raised the growth rate in net finance expenses to about 188% and caused a drop of 11.2% in pre-tax profit.

The company’s debt profile shows a new short-term borrowing of N11 billion in the current year. That has raised outstanding loans and borrowing by over 10% to about N24.5 billion at the end of June. The increase doesn’t appear big enough to cause the major kink seen in interest expenses but the resort to short-term borrowing unlike in the preceding year may explain the high jump.

Apart from finance expenses, cost of sales also encroached on sales revenue during the period, having grown by 7.7% – twice as fast as the growth in sales revenue. It claimed slightly more than all the net increase in sales revenue and therefore reduced gross profit margin. Tight controls on marketing/distribution expenses and administrative cost helped the company to defend operating profit.

The company is showing a significantly improved cash flow position for the current year with sharp drops in net cash utilized for investing and financing activities. This has shifted the company’s position from a net cash decrease of N13.56 billion in the same period last year to a net cash increase of N7.4 billion at the end of June.

Earnings per share amounted to N2.40 at the end of the second quarter against N2.71 in the same period last year. The full year outlook indicates earnings per share of N4.89 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.