Nigerian Breweries slows down on the downside

Nigerian Breweries Plc recorded an upbeat in the third quarter as economic activity gained momentum, though not strong enough to change the downtrend it is experiencing for the third straight year.

Upturns in sales and profit marked the company’s trading in the third quarter.

The big event in the third quarter is a big rebound in profit from a 98 percent crash in the second quarter to a 229 percent lifting quarter-on-quarter. The brewing company changed its earnings story from a loss of over N1 billion in the same quarter last year to an after tax profit of N1.35 billion for the third quarter, 2020.

The boost in the bottom line reflects equally a change of narration from a drop of 21 percent in sales revenue to a strong growth of 25.6 percent quarter-on-quarter to over N82 billion. The gain in sales was further reinforced by a decline in some key expense lines during the quarter.

There was therefore a step up of profit capacity for the company during the review period. Gross profit turned around from a drop of about 34 percent in the second quarter to a 25.6 percent growth in the third quarter. Also, operating profit reversed from a 60 percent crash in the second quarter and multiplied more than 10 times quarter-on-quarter to N7.4 billion in the third.

Rising finance expenses remain a challenge for the company but management was able to absorb the rising cost with the strong growth in operating profit. This changed the situation where finance expenses were in excess of operating profit, as recorded in the second quarter and in the same period in 2019.

On year-on-year, Nigerian Breweries is still losing sales revenue and profit but the upturn in the third quarter slowed down the rate of the drop. Despite the slowdown, profit is still headed for an accelerated drop this year.

The year-on-year profit drop remains high over 43 percent at the end of the third quarter, down from 58 percent at half year. It remains an accelerating drop from the 17 percent the company recorded at the end of 2019 operations.

Nigerian Breweries closed the third quarter operations with net sales revenue slightly down to N234 billion. The upturn in sales in the third quarter improved the year-on-year position from a drop of roughly 11 percent in sales at half year to the marginal decline at the end of the third quarter.

Inability to improve sales revenue has lingered since 2018, which has undermined profit capacity considerably. How to grow sales revenue and moderate rising input and finance expenses remain the management’s challenges.

The company’s peak sales revenue is the N344.6 billion it posted in 2017. Seasonal sales in the final quarter are expected to step up turnover from marginal decline at the end of the third quarter to a moderate improvement at full year. Yet the company isn’t expected to come close to its 2017 revenue high.

A new profit low is likely for Nigerian Breweries at the end of 2020 financial year. Its N16 billion profit figure at the end of 2019 operations is the lowest in more than a decade. The company is still headed for the highest profit drop in many years in the current financial year.

Rapidly rising costs explain the drop of over 43 percent in profit against a slight decline in revenue. Two major cost lines account for the cost increases facing the company so far this year. These are administrative and finance expenses, both of which claimed increased proportions of revenue at the end of the third quarter.

Administrative expenses grew by 11 percent year-on-year to nearly N16 billion at the end of the third quarter, claiming roughly 18 percent of gross profit compared to below 15 percent in the same period in 2019.

The company paid close to N12 billion in finance expenses at the end of the third quarter, which is a year-on-year growth of over 43 percent. With a decline in finance income, net finance expenses rose by about 45 percent to N11.5 billion over the period.

Rising cost of finance reflects increased bank borrowings this year. Total balance sheet debts have expanded from N56 billion at the end of 2019 to over N133 billion at the end of the third quarter, down however from N139 billion at half year.

The cost increases left margins squeezed across the board. Net profit margin dropped from 5.2 percent in the same period last year to less than 3 percent at the end of the third quarter, the lowest profit margin in more than a decade.

The outlook for the final quarter of the year indicates that sales revenue may strengthen up further while costs are likely to keep choking margins. The accelerated drop in profit may therefore follow the company to full year.

Nigerian Breweries earned 87 kobo per share at the end of the third quarter operations, down from N1.53 per share in the same period last year.