GCR Ratings (“GCR”) has assigned national scale long-term and short-term Issuer ratings of A(NG) and A1(NG), respectively, to International Breweries Plc, with the Outlook accorded as Stable.
The ratings of International Breweries Plc (“IBPLC” or “the Company”) are underpinned by its mid-to-strong competitive position within the Nigerian brewery industry, and the ongoing operational and strategic support from its parent company, Anheuser-Bush InBev SA/NV (“AB InBev”), the world largest brewing company with operations in more than 150 countries. This is however counterbalanced with persistent operating losses and weak credit protections metrics.
IBPLC became the second largest brewer in Nigeria following the merger of AB InBev’s three Nigerian subsidiaries (IBPLC, Intafact Breweries Limited and Pabod Breweries Limited). Since FY18, the Company spent circa N145bn, expanding its brewing capacity to 9 million hectolitre per annum across four brewing plants. IBPLC has a well-diversified beer portfolio, including some major local brands across the premium, mid and value segments. Diversification from beers is limited and IBPLC’s earnings are almost entirely generated in Nigeria – this is not expected to change.
Although IBPLC has reported steady growth in revenue since integration, earnings resilience has been weak with persistent operating losses. Margin pressure has been driven by the depreciation of the Naira, which has raised the prices of imported raw materials input and other capital and operating expenses. Depreciation also remains high which relates to returnable packaging materials. Volume growth and efficiency improvements are expected to contribute to higher margins going forward, however GCR expects profitability to remain weak in the short term because of high fixed costs and foreign exchange exposures.
The Company’s weak gearing profile is also a negative rating factor. Gross debt spiked from just N8.5bn at FY16 to a high of N264.9bn at FY19, mainly attributable to additional loans obtained to fund expansion post the merger. The shareholder supported right issue raised N164bn in FY20, with the proceeds being used to reduce the debt burden to N112.4bn. This, together with higher EBITDA, saw net debt to EBITDA reduce to a more sustainable 3.7x in FY20, compared to a high of 19x reported at FY19, albeit still somewhat high. Furthermore, the lower debt also resulted into significant improvement in other credit protection metrics with net interest coverage rising to 12.8x at FY20 (FY19: 0.9x) and operating cash flow coverage of debt registering at 44.5% (FY19: 10.2%) bolstered by huge working capital release. GCR expects net debt to EBITDA to register around 3x – 3.5x by FY21 on account of expected slight improvement in EBITDA, with interest coverage also improving because of the lower debt. However, some pressure on cash flow coverage may arise once IBPLC begins to unwind its intergroup trade creditors.
GCR has taken a negative view of the short term nature of almost all debt which is largely denominated in USD resulting into substantial foreign exchange exposure, as well as the concentration to a single funding counterparty. IBPLC’s plans to access the capital markets in the near term should support improved funding flexibility.
IBPLC evidences a good liquidity profile, with its sources versus uses liquidity coverage estimated at above 1.9x over a 12-month period to FY21. This is predicated on the substantial committed facilities from other recently engaged commercial banks, which are revolving in nature, and N33.5bn in cash holdings. Notwithstanding the high short term debt, this adequately covers debt refinancing requirements. In addition, IBPLC is also scaling down capex spend, which will allow internal cash generated to be used for working capital. GCR thus expects liquidity coverage to be sustained at around 2x by FY21.
GCR has factored strong group support into the ratings for IBPLC, demonstrated by ongoing operational, technical and financial support. In this regard, IBPLC is well integrated into the broader AB InBev, with key management seconded to it to support operational improvements. More importantly, recently AB InBev directly spent N90bn (USD250m) towards capacity expansion, invested N124bn (USD341m) to take up its rights in FY20 and continues to fully guarantee all IBPLC’s existing debt obligation (excluding leases) with its bank lenders.
The Stable Outlook reflects GCR’s view that IBPC will continue to benefit from tangible technical and financial support from AB InBev until there is meaningful improvement in operational performance, earnings, and credit protection metrics. In this regard, GCR does expect a gradual improvement on the back of earnings performance, as additional volumes are produced, and efficiency improvements take root.
Sustained growth in revenue and firmer margins that translate into profitability and improvement in operating cash flows. Positive rating action could also emanate from favourable restructuring of the debt profile, as well as improvement in earnings based gearing metrics below 200%.
Conversely, a rating downgrade could result if IBPLC is unable to sustainably improve operations, such that the Company continues to report operating losses. A renewed increase in debt, and corresponding weakening in the credit protection metrics would be negatively viewed. GCR would also negatively view any perceived change in shareholder support.