When Belgium’s AB InBev, the world’s largest brewer, acquired SAB Miller Nigeria, former owner of International Breweries, Pabod Breweries and Intafact Breweries in 2016 , many observers and analysts believed it was a signal that the end of decades of dominance of the brewery industry by Nigerian Breweries and Guinness ,Nigeria Plc has come .
The current owner did not stop at that . It invested over $250million in the Nigerian beer industry by Q2 2018 and merged the three entities into one under the name of International Breweries in 23 Mar 2021 to further sharpen its competitive edge, ; between September 2021 and September ,2022 , by 117 % increment to N35.13b from N16.18b it acquired property, plant and equipment to further beef itself up . Even its Managing Director, Mr. Hugo Dias Rocha did not hide its strategic intent : “Our dream of achieving market leadership of the beer industry in Nigeria remains unshaken as we are confident in our abilities and commitment as a team.”
Since the takeover by this beer giant ,International Breweries has cast a shadow bigger than its size. Indeed , the new owner of IB Plc is not hiding the fire in its underbelly and is sending a signal of how ambitious it is ; one thing is clear about these initiatives : they continue t o send jitters down the spines of the incumbent market leaders in the industry at one time or the other .
However , against the hope raised and stakeholders expectations , the portents are increasingly gloomy .More and more signals are pointing to the other directions ; despite this intimidating image , to the surprise of industry analysts ,the company has only become a mere serial losers ; for its inability to translate its huge potentials to the expected fortunes but instead sustaining back to back losses in the last five consecutive financial years ,the company has turned itself to an albatross for its shareholders ,creating more fears than dreams on their faces . .
International Breweries Plc has remained in the wood for long against the big hope raised by its new owner to change the calculus of the industry leadership , and there is no respite for its recovery . Its 2021 FY Audited Financial Statement, revealed a loss after tax of N17.66 billion ; before this , the brewery had declared bottom line loss for three consecutive years since 2018, posting a loss of N3.93 billion. In 2019, the loss declared spiraled by an overwhelming 607% to N27.79 billion ; its loss ,however ,declined in 2020 to N16.08 billion. Within the three years, ironically , the company grew its revenue by over 51% on the back of inflationary pressures driven by increases in prices of goods and services over the years. This implies ,this potentially giant brewer is making money but finds it difficult to translate to net income or bottom line
In the ongoing financial year, a glitter of hope surfaced in the first quarter . International Breweries Plc in its first quarter ended March 31, 2022 reported stronger growth in revenue backed by consumer demand for its brands to migrate into impressive earnings and positioned to deliver enhanced profits in 2022 financial year. The volume growth was ahead of industry expectations that drove revenue by 48 per cent in the first quarter of 2022 and contributed to the company’s migration from loss to positive results in the period under review. The unaudited first quarter, 2022 financial result and accounts of International Breweries showed N57.52 billion revenue from N38.96 billion reported in Q1 2021.
But this hope dramatically fizzled out in the second and third quarters signaling another doom in 2022 .Although , International Breweries Plc ,makers of “Hero” Lager , reported a Profit After Tax of N336.20mn for the half year period ended 30 June, 2022, a 102.2% upward push from the N13.88bn loss it reported for the same period in 2021,it was on the strength of the first quarter result .This is because in three months ,between April and June , it recorded another loss of N384.97m . This loss ,however , could not be covered again in the third quarter; its loss for the period for that period was N3.15b and for the nine months was N2.81b in 2022 as against N2.22b and N14.00b losses in 2021 respectively .
The unimpressive showings in the last five years are very much against its stakeholders’ expectations .Its shareholders have been at the receiving end of the above miserable scenario. One of the corporate responsibilities of the top management is to keep the shareholders satisfied ;shareholders require maximum or adequate returns on their investments in order to remain invested in the company and to be willing to continue to provide additional resources and when needed. From the shareholders point of view what matters is the cash generating capability of the business since this determines the ability to pay dividends in the short term and to reinvest for the future which enable the future flow of dividends payments. The company has ,indeed , continued to generate cash impressively confirming high demand for its brands despite heated competition confronted by it .However , its capacity to manage the values is questionable ; its cash generating capacity, though enormous ,its cash flow shows its cash hemorrhages easily too . In third quarter of 2022 ,for instance ,its cash and cash equivalents at the end of the period was N24.85b,70% down from N82.38b in the corresponding period of 2021
Sequel to this tragic scenario , its shareholders have not received any dividend since 2016 when it was taken over by Anheuser-Busch InBev ; yet ,more agonizing is that nothing tangible is forthcoming as capital gain for them too .
The current share price of International Breweries (INTBREW) is NGN 4.15. INTBREW closed its last trading day (Friday, November 4, 2022) at 4.15 NGN per share on the Nigerian Stock Exchange (NGX). International Breweries began the year with a share price of 4.95 NGN but has since lost 16.2% off that price valuation, ranking it 118th on the NGX in terms of year-to-date performance. Shareholders’ worries are compounded by the fact that INTBREW has lost 8% of the stock’s value from October 6th to date
INTBREW Stock Market Performance
A good way to determine earnings to the investor is the Earning Per Share (EPS), which is the monetary share value, i.e., what every share issued by the bank will receive from declared earnings. The higher the EPS, the more profitable the company is. International Breweries EPS has been consistently negative in the last few years ;it worsened from 8k to 12k negatively in third quarter of 2021 compared to the same period of 2022 . Full five years EPS for the company have been largely negative . It was only in 2017 it recorded a positive EPS of 16k . Its EPS took negative postures in four out of five years consecutively : 66k ,in 2021 ; 61k,in 2020 ; in 2019 , N1.16k and in 2018, 45k per share . This means that investors holding shares of International Breweries are consistently at the receiving end of its poor performances since it came under a new and current ownership .
However , while EPS refers to corporate value and does not indicate cash value to the investors, even its dividend yield which does this is not saying a different as regards the misfortunes unleashed by IB Plc uninspiring runs in the past few years on its shareholders as the company has not reported any recent payouts .
|How does INTBREW dividend yield compare to the market?
|Market Bottom 25% (NG)
|Market Top 25% (NG)
|Industry Average (Beverage)
|Analyst forecast in 3 Years (INTBREW)
The dividend yield also allows investors to compare International Breweries shares with other non-equity products like Treasury Bills and Commercial paper; this makes investing in this company by those that cannot exercise patience unadvisable as other alternative channels are more profitable in terms of returns .
A final measure that exposes the hopelessness of the InterBrew investors is the Price to Earnings Ratio (P.E.) which is the Price of the stock divided by the earnings of the stock. P.E. is useful in determining how “cheap” or expensive a stock is. It will be factually incorrect to simply say that one company share is cheaper because the market price is cheaper, we have to look at the P.E. ratio. For International Breweries , its PE ratio at -32.5x exposes the poor investors’ perception of the company’s performance . This is a confirmation that this company is losing money or with negative earnings and investors must not invest in companies with consistent negative P/E ratios as they may go bankrupt. Analysis of its returns on earnings trend indicates INTBREW is unprofitable, and its losses have increased over the past five years at a rate of 27.2% per year ;it has a negative Return on Equity (-2.49%), as it is currently unprofitable.
QUARTER 3 ,2022 : Cataclysmic Loss Again .
A critical analysis of its q3 ,2022 results shows the company’s operational scenario has not departed from what it used to be in the last few years . While it indicates it is not yet out of the wood ,it also confirms its inability to do this is not because it could not generate impressive revenues or lack of demand for its products but its top management less impressive control over some macroeconomic headwinds triggered by inflationary pressures, high operating costs and consumer’s low purchasing power leading to another looming year of loss at the bottom line .
This is confirmed by its value creation mechanism which shows the financial management pedigree of the company’s leadership is still below stakeholders’ expectations . This may not be farfetched . One evidence of these inabilities comes from the funds from operations ,clearly major contributors to value creation . Although the sales revenues determined by sales volume and the prices that an organisation is able to maintain in its markets have remained positive and competitive ,the production and selling costs that are made up of fixed and variable elements and overhead or indirect costs have continued to put its revenue profile under serious threat .
The ugly scenario painted above , however , could be easily traced more to the inclement environment . In the last nine months in 2022 as it was in 2021, and indeed few years back in time, the competitive space in the brewing industry has been paved with the daunting challenges posed by strong macroeconomic headwinds , setting up the industry for failure. These include the erratic supply of public electricity, falling naira, weak logistics, insecurity, and other high costs of operations attributable to poor infrastructure which have continued to make the business operating environment difficult, especially for the real sector of the economy
Despite this International Breweries maintained a steady revenue growth profile. In the last nine months of 2022 , the brewing giant helped more Nigerians to reach for more trophies as they imbibed more of its brands . Financially speaking, it translated to a 5.6% rise in the amount of products consumed in the period . That is, it swelled from N46 billion in Q3 2021 to N49 billion .Much of the success can be pinned to the management initiatives including excellent promotions the company embarked upon in the period .Moreover , the company noted , this could be attributed to its resilience during the period led by its core brands, premium portfolio and innovation. As part of its “Beyond Beer” strategy, the company launched Flying Fish during the quarter to address incremental occasions and consumer needs. The company claimed this had been well received and continued to gain acceptance in the market.
COST OF SALES
All of these had a significant impact on sale even if it hiked the cost of doing business. To sell these liquids of pleasure is not always easy for bottlers and brewers as is the case for all manufacturers. The trend is that the cost for that as represented by the cost of sales on the profit and loss account never goes down. The only direction it travels is northwards. During the period, the cost of sales was valued at N38 billion, a 17 percent high from the N33 billion in the same period last year . However , while IB Plc posted positive revenue in 2020 and 2021 and continued this in 2022 financial years ,the company has been achieving these higher revenue numbers on the back of vastly increasing cost of sales . In 2020 financial year ,to achieve N100 revenue , it cost it N78; in 2021 ,N75 and currently in the third quarter of 2022 ,it took it N79 .This is reflected in its consistent negative EPS . This indicates IB Plc is willing to incur huge marketing costs to capture market share .
It was this inability to carefully tame the cost of sales that hit hard on the gross return of the Manufacturer of Trophy larger in the current financial year .Consequently , the gross profit stood at N10 billion from N13 billion in the same period last year.
Doing business in this environment requires a hulk of expenditure whose destructive aim is to shatter an operator’s profits. It is the reason why the company’s operations cost hiked up significantly by to N1.3 billion from N131 million in Q3 last year.
With the fleet footed cost of doing business, the company’s trading profit got down to a loss of N3.94 billion in the third quarter from N366.56m operating income .
Another angle that shed some lights on the company’s performance in the period under review as in the last few years is its financing income relative to its to its financing costs or the mix of capital between the debt which requires interest payments and equity is another ; this usually determines the cost of capital and financial risk . In the period under review there is every indication that the company is highly leveraged . This is where the company received the most cataclysmic misfortune . A look at IB Plc Equity multiplier , a leverage ratio that measures the portion of the company’s assets that are financed by equity confirmed this as much . A high multiplier indicates that a significant portion of a firm’s assets are financed by debt, while a low multiplier shows that either the firm is unable to obtain debt from lenders or the management is avoiding the use of debt to purchase assets. As at September 2022, with a total assets of N414.97b and its total equity of N135.80 as against N469. 95b and equity of N 135.30b , in the corresponding period of 2021, leading to IB Plc equity multiplier of 3.06 in the third quarter of 2022 and debt to assets or debt ratio is 0.67 or 67 %,indicating it financed 67% of the assets by debt .
This funding strategic direction was highly disastrous . Although the positive performance from the finance income or interest received from the company’s prudent investments in the financial market was up by 375% to N2 .80b from N588.41m , however , this was too feeble to cage the finance cost that hit N7. 11b in September ,2022 from N949.72m in September 2021 . Ultimately, with heavy finance cost which jumped by 273 % this resulted in a net finance costs of N4.31 b as against net finance cost of N1.32b in September ,2021 . Consequently this messed up the company and led to a tragedy that hit the pretax profit .
The equity multiplier posed a high risk to its creditors, although the company is confident of its impressive cash flow history ,notwithstanding because the company incurred high debt service charges this depreciated its heavily within the period under review . Sequel to this its Net cash inflow from operating activities was down to N20.16 b from N40.61b while its Cash and cash equivalents at the end of the period nosedived heavily to N24.85b from N82.38b
Furthermore , investment in assets is another critical determinant of the bottom line .This affected the value creation through the cost of capital investment , disposal of redundant assets and the management of the elements of working capital like stocks ,debtors and creditors which can increase or decrease shareholders value . The company planned to improve facilities as it committed N35.13b investment in September ,2022 , a 117% jump compared to N16.18b it invested the year before September 2021 for the acquisition of property, plant and equipment .This impacted heavily on its cash flow in first nine months of the current financial year .
However , since the value created from assets invested usually rests on the extent to which assets and working capital are stretched by the company, the degree of values added to the fortunes of this company depends on its competences . Though , the investments may be a drain on its cash flow during the period under review or not adding much value now , this is a move that investors should be interested in because investment signals improvement and better results on the floor of the Nigerian Stock Exchange. The move itself indicates that the company’s management is a subscriber to the never ending improvement principle and these investments have strong potentials to the bottom line in the subsequently years by supporting much higher levels of business from the same asset base than others
The miserable performance only worsened its profit margins, indicating inefficiency in terms of the contribution of turnover to gross profits, pretax and net profits.
Pretax margins which, is an indicator of how well the company is doing at controlling costs strolled upwards from -13.5 percent to -1.8 percent. That is it lost almost 2kobo from every one naira of turnover as opposed to 13.5k loss in the corresponding period of 2021.
NET PROFIT MARGINS –
The slow-moving in pre-tax margin was contagious pinning net profit margin to a loss of 2k percent from-11K loss in the same period last year. The margin not only improved with the loss coming down , it also represents gains for the company in a year that inflation remained at double digits.
The damaging impact of its net finance cost is visible on its pre tax Profit as it cascaded leading to a loss of N4.67b from a similar by lower loss of N132.02m in 2021
PROFIT AFTER TAX
Ultimately , the increase in the cost of sales and other expenses led to a loss record for the period to the tune of N3.1 billion compared to a similar loss of N2.2 billion same time last year.
CASH MANAGEMENT UNDER THREAT
However ,the company’s cash management ability worsened and therefore its liquidity in the period under review ; the company needs to re- jigging its debt profile in the process
RECEIVABLE TURNOVER .
The IB Plc got its payment faster by 16 from debtors as its days receivable shortened to 56 days from 70 .This is as its receivable turnover improved to 5.6 from 6.5
PAYABLE TURNOVER .It however delayed payments to its creditors by 365 days the same time last year .
INVENTORY TURNOVER Stocks in the company’s warehouse spend less time before they are shipped to customers. The inventory last 61 days when previously they sat around for 73 days
All of this ensured a shorter cash cycle for the company, falling to 482 days from 508 days.
The improved cash cycle did little to improve the company’s liquidity as current ratio sank. This, ostensibly, is because of the company’s increased debt profile than it had none in the previous year.
But overall financial leverage is greater than last year because the company did not succeed in vanquishing term loans, making the company less attractive to investors.
Beyond the negative impact of its funding strategy on its profitability, the damaging effect of this on its liquidity is equally enormous. A look at its current ratio which measures how well is a business able to pay its current liabilities using only its current assets confirms this assertion. In third quarter of 2022 ,its current ratio at 0.45 compared to 0.53 in the corresponding period of 2021 This is an indication that the company cannot currently meet its financial obligations peacefully . This is equally applicable to its quick ratio which worsened from 0.33 in the first nine months of 2021 to 0.29 in 2022 . If the quick ratio is under 1, this would instead indicate that the company would have difficulty paying its debts.
But the company is still attributing misfortunes to institutional factors .The company in a statement however said its volumes declined in the third quarter of 2022 due to a soft industry and ongoing supply chain constraints. Hugo Rocha, the company’s Managing Director, attributed the development to ongoing supply chain constraints, and the impact of inflation on consumers’ disposable income in the last three months.
He states, “The last three months have been characterized by elevated inflationary pressure which has had an impact on consumers’ disposable income. The period experienced especially severe weather with a longer rainy season and floods in key markets. However, despite the difficult quarter, we remain focused on our winning commercial strategy. Year-to-date, our brands remain resilient and continue to deliver volume growth. We remain committed to returning to profitability and creating value for our stakeholders.”
Although there is no doubt that monetary and fiscal policy, trade and industrial policy, national levels of educational achievement, the structure of corporate ownership, and the social norms and values that predominate in a particular environment have an impact on the competitiveness of firms , Yet too often executives have used supposed institutional disadvantages as an escape clause for poor competitive performance .
In blaming institutional factors for competitive ill-health, companies are prone to overlook the institutional disadvantages of their rivals