Nigerian Breweries Plc…Earnings Recovery in Sight

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In what was a tumultuous year for brewery companies, due to the impact of the coronavirus pandemic, Nigerian Breweries Plc demonstrated its resilience and market leadership status.

The Company’s revenue grew by 4% YoY, from N323.01bn in FY’2019 to N337.05bn in FY’2020. During the first half of the financial year, revenue dipped by 11% YoY from N170.19bn to N151.81bn, on the back of lockdown directives and other movement restrictions by the national authorities to contain the spread of the coronavirus.

The restrictions implied the closure of bars and other major sale points. The coronavirus pandemic also induced a supply chain disruption, which resulted in lower production activities.

Insider Dealing: Heineken Brouwerijen B.V Purchases 274,542 Shares in Nigerian Breweries

However, the Company recorded a 22% YoY revenue growth in the second half of the year from N152.73bn to N185.24bn. The growth drivers in H2’2020 were a combination of price and volume growth. On volume, the economy reopening supported the growth during the period.

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The Company embarked on product innovation by producing variants and different flavours of major brands, to meet consumer preferences and taste. In addition, the strategic decision of the Company to focus more on the premium brands yielded positively on topline growth.

Furthermore, the Company’s improved distribution and route-to-market strategy drove increased sales during the period.

The Company raised the prices of its products during the year, amid rising raw material costs. In addition, the combined effect of an exchange rate devaluation and higher VAT left the Company with no option but to reflect the higher costs in the form of higher prices.

In FY’2020, the cost of sales rose by 14% YoY from N191.76bn to N218.36bn, therefore, resulting in a 600 basis points increase in cost margin from 59% in FY’2019 to 65% in FY’2020. The 4% YoY revenue growth in FY’2020, relative to the 14% YoY cost increase, suggests that the Company did not totally pass on the cost burden to consumers.

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As a result, margins shrank. In our view, the inability to pass on the cost burden stems from the sensitivity of the consumers to prices of the Company’s products, amid declining household income and intense industry competition.

Operating Efficiency Achieved, But not enough.

Operating expense (OpEx) margin lowered from 30% in FY’2019 to 27% in FY’2020, reflecting a 7% YoY decline in OpEx, from N97.05bn in FY’2019 to N89.91bn in FY’2020. A 9% decline in marketing and distribution expense (which contributes c.80% of total operating expenses) drove the overall OpEx decline.

We attribute the marketing expenses decline to the inability of the Company to execute some marketing and promotional activities due to social distancing.

Currency Devaluation Worsen Bottomline

Operating profit, nonetheless, declined by 16% YoY from N35.21bn to N29.61bn. The material decline in gross margin (from 41% in FY’2019 to 35% in FY’2020) due to high input costs, impacted negatively on the bottom line. Net finance cost spiked by 52% YoY from N11.85bn to N18.03bn, driven by a N4.77bn net foreign exchange loss.

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Also, interest expense on lease liabilities rose from N19.70mn in FY’2019 to N4.17bn in FY’2020. As a result, the Company’s profit recorded a steep decline.

Profit before tax nosedived by 50% YoY, from N23.35bn in FY’2019 to N11.58bn in FY’2020. Owing to a higher effective tax rate, from 31% in FY’2019 to 36% in FY’2020, profit after tax declined 54% YoY from N16.11bn in FY’2019 to N7.37bn in FY’2020.

In line with the Company’s 100% dividend payout trend, the Company declared a N0.94 total dividend (interim dividend: N0.25; final dividend: N0.69) for FY’2020.

Having declared and paid a N0.25 interim dividend during the financial year, a N0.69 final dividend will be paid on April 23, 2021. The final dividend qualification date is on March 10, 2021.

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Delayed Payments to Creditors Drive Strong Cash Flow Generation

Operating cash flow spiked by 114% YoY, from N38.89bn in FY’2019 to N83.27bn in FY’2020. The significant increase in operating cash flows resulted from a N50.30bn delayed payables to creditors. According to the management, most of the payables were owed to the Company’s parent company, Heineken. In our view, we posit that the Company benefitted from favourable credit terms from its parent company as support to prop up liquidity, amid the negative effects of the coronavirus pandemic on operations.

Historical Income Statement

Nigerian Breweries Plc...Earnings Recovery in Sight brandspurng
Source: Company Accounts, WSTC Research

Outlook

We expect the Company to drive growth via an increased focus on the premium segment of its brands, and product innovation. The management guided that amid the macroeconomic challenges that have constrained household income and demand, the focus will be more on the market where consumers are willing to pay more for value (i.e., the premium segment).

Some initiatives to drive value in the premium segment include the rebranding of products in sleek cans and the introduction of new products.

We also expect to see increased product offerings and variations in the near to medium term, as the Company aims to meet consumer preferences. In December 2020, the Company launched a new product ‘Desperados’, a tequila-flavoured beer into the market. Nonetheless, we believe that cost pressures will persist, thereby limiting the topline gains.

Valuation

We estimate a N439.59bn (value per share: N54.97) for Nigerian Breweries Plc, using a blend of Discounted Cash Flow, Discounted Dividend Model, Residual Income Model valuation methodologies.

Our valuation considerations include:

  • Possibility of higher prices in the near to medium term.
  • Increased market share resulting from product innovation and higher product-mix.
  • Macroeconomic challenges leading to increased cost pressures.

At the current market value (N415.84bn), we believe that the stock offers a 10% total return (price return: 6%; dividend yield: 4%).

Hence, we recommend a HOLD.

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