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Nigerian Breweries: Meeting the Challenges of a Rough Competitive Space

 In the last financial year as it was the one before and indeed many more years back in time, the competitive space in the brewing industry was paved with infrastructural obstacles ,increased competition, high  operational cost  and fall in consumers , setting up the industry for failure.  The risk to these companies is the shrinking market. Prices cannot be cut forever, thus productivity improvements to reduce costs will be the differentiator.

 Indeed, the most  deleterious  of the challenges  are the negative impact of the skyrocketing  cost of raw materials or cost of sales and the falling consumers that hit hard on the fortunes of brewers. Raw materials and consumables witnessed a 17% increase in 2020. In a bid to resolve the cost debacle ,virtually all the players  in the industry  became a victim of  debt quagmire with raging finance costs  ;debts have remained another dangerous killer of the bottom line.

 Nigerian Breweries was not excluded .The company’s financial statements have been a testament to its streamlined market share and reducing profits. Going by its 2020 financials .NB Plc posted a 9% drop in Gross Profit  .Net Income for NB Plc was posted at N7.36b, a huge 54% fall from 2019 figures. NB Plc  started seeing  negative Net Income figures since 2018 and posted negative Total Revenues numbers for two out of the last three years since 2018.

  But the  Nigerian Breweries, no doubt ,is gradually turning  the above adversity to success as it returned to a steady  growth profile with  all its major performance metrics in 2021 pointing sharply northward.  Though NB’s earnings declined by 28.8% per year over the past 5 years however ,its  earnings growth over the past year at 72% exceeds its 5-year average (-28.8% per year).;its  earnings growth over the past year at 72%  exceeded the Beverage industry 68.9%. Its  Return on Equity which was 4.48 % in 2020  is currently  7.4% .

For this, its share valuation has continued to send out signals of a growing optimism and expectations in terms of better returns and investors too have continued to aknowledge its robust future potentials .Its PE Ratio is  25.6x  compared to the African Beverage industry average at 17.9x  and the   market at 8.5x .NB is believed to be  good value based on its PEG Ratio at 0.9x  .The trend could be seen  on its PB Ratio (1.9x) compared to the   Beverage industry average.This is a fact behind its impressive market value and its sector’s leadership in this area .

Based on estimates from 5 analysts  Nigerian Breweries annual earnings growth  is  forecasted  to deliver 28.2% per year  in the next 1 to 3 years ;its forecast earnings growth of 28.2% per year   is above the savings rate at 13% ,; it is also  forecast to grow faster than the NG market at 14.3% per year  and  its earnings are expected to grow significantly over the next 3 years. NB’s Return on Equity is forecast to be 15.3% in 3 years time

 The above optimism expressed by analysts may not be farfetched .  In the last financial year, the brewing giant helped more Nigerians to reach for greatness and pleasure as they imbibed more of its brands and its associated brews

The most capitalized brewery recorded positive result on the back of the inflationary pressures during the review period, which most fast-moving consumer goods benefitted from, especially during the festive season .

Financially speaking, it translated to an 11 percent rise in the amount of products consumed in the period.  That is ,it swelled by 29.7% to N 437.29b   from N337.05b 

Much of the success can be pinned to the excellent promotions the company embarked upon in the period; its  advertising and sales promotion  increased by 59% to N39.48b from N24.86b  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.  Nigerian Breweries was not able to contain that polar movement as its  Cost of Sales   increased by  26.percent to N276.87b from N218.36b

 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 to N123.55b from N89.91b , a 37.4 %  increase . This though is an industry wide phenomenon  

 Though taming  its cost of sales was hard ,it  still beefed up the gross return ; the Manufacturer of  Guilder and Star gross profit inched up  to  N160.41b from N118.69b ,a rise of  35.2 percent

Also , despite the fleet footed cost of doing business, the company jerked up trading profit  40.2 percent  to N41.49b from N29.60b .Profits at the company rallied as a result, pumping up pretax profit at a rate of 104.7% to N23.70b 1  from  N11.58b   This was helped by interest received from the company’s prudent investments in the financial market which rose 27.3%  to  N313.52b from N246.28b 

However , two issues worked against a strong  improvement in  bottom line . Firstly  , paying more taxes to the  taxman by clearing its backlog of deferred tax and secondly through a Net loss suffered  on foreign exchange transactions of  N7.041b in 2021 as against N4.77b in 2020  were those issues that became a spoiler in 2021 to its profitability  ; Income tax expense  increased by 162% to N11.03b from N 4.21b  . Between 2020 and 2021 its net tax assets declined from N10.12b to N5.35b in 2021 as against its net tax liabilities of  N27.97 b and N28.63b indicating a net tax liabilities of NN23.28b in 2021 and N17.85b in 2020 .

Sequel to this above , its handsome pre  tax  profits only ensured marginal improvements in profitability or the efficiency in terms of the contribution of turnover to net profits  This is demonstrated by its profit margins

Pretax margins which, is an indicator of how well the company is doing at controlling costs strolled upwards from 3.4%  percent to 5.4 %  percent. That is it made less than 4 kobo from every one naira of turnover. It also  means that the37.4percent rise in operating costs may be too high for the  brewer   The slow-moving pre-tax margin was contagious pinning net profit margin to 2.9 %, same as for last year. With the stagnant margin , it represents loss for the company in a year that inflation remained at  double  digits.

LANDMARK STEPS THAT SET  NEW PACE  FOR BETTER FUTURE  PERFORMANCE

Though the only immediate gain in 2021 is that  it reduced its finance cost ,the  re- jigging of  its debt profile is setting the company for better profitability in the future. This is a fact   despite the fact   its cash management ability was strained  and  consequently  its liquidity in the period under review .     

Its heavy loan stock has continued to weigh down its net income in the last few years but company has taken some decisive steps to reduce it and curtail its negative impact on cost . Between 2020 and 2021 , it repaid   N95.45b  and N106.95b while  proceeds from loans and borrowings were N67.60b  and  N109.86b respectively  Also ,its repayment of lease liabilities stood at N8.64b and        N6.31 b as its interest paid nosedived to N5 . 46b from N8.37b .Between 2020 and 2021 ,  the company its loan stocks  were N31.37b  from N91.45b respectively

 The impact of this is clear .The  overall financial leverage is lower than last year because the company succeeded in vanquishing term loans, making the company more attractive to investors; ,its debt to equity ratio came down heavily  reflecting a less leveraged position of the company In general, if  a company  debt-to-equity ratio is too high, it’s a signal that the  company may be in financial distress and unable to pay  its  debtors. But if it’s too low, it’s a sign that  the company is over-relying on equity to finance your business, which can be costly and inefficient. A very low debt-to-equity ratio puts a company at risk for a leveraged buyout, warns Knight. Nigerian Breweries’ decision is apposite as  Low debt-to-equity ratio suits companies operating under volatile and unpredictable business environments as they cannot afford financial commitments that they cannot meet in case of sudden downturns in economic activity.  Moreover, NB’s net debt to equity ratio (6.5%) is considered satisfactory ;its debt is well covered by operating cash flow (327.2%).just as its  interest payments on its debt are well covered by EBIT (3.8x coverage).

But this consequently  led to its cash and cash equivalent nose diving by 44.9 % to N16.73b from N30.37b  .The  heavy reduction of its  loan stock   impacted  negatively on its  cash cycle and therefore its company’s liquidity as its  current ratio sank..The negative impact of this could be read from its tight current liquidity position which was flat at 0.44 and its quick ratio at 0.2 and 0.27  indicating  that the company would have difficulty paying its debts.   

 To further ensure more efficient productivity the company plans to improve facilities as it is committing N9.62 billion to investment as opposed to the N1.2 billion it invested the year before. This would ensure upgrade of  its  brewery, according to company  to an insider

This seems 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. Why, these breweries just bagged international awards for quality at the international stage.

Much like other old money companies, Nigerian Breweries has done its bit to remain relevant in the industry by  creating new variants of existing favoured brands  .   The company offers its products under the Star, Heineken, Gulder, Goldberg, 33 Export, Life, More, Ace Bitters, Star Radler, Star Lite, Desperados, Tiger, Legend, Williams, Turbo King, Amstel, Maltina, Malta Gold, Hi-Malt, fayrouz, and Climax brands.  

It has also been paying dividends consistently annually for the past few years  The Board  of Nigerian Breweries has  recommended  to Shareholders at the forthcoming Annual General   the declaration of a total dividend of ₦12,921,331,039 translating to one hundred and sixty  Kobo per ordinary share of Fifty (50) kobo each. The total dividend is comprised of an interim dividend of N3,230,332,760 or forty Kobo per share which was declared in October 2021, and a final dividend of ₦9,690,998,280 or 120 (One hundred and twenty) Kobo per share

 In spite of the above ,NB Plc, when compared to Guinness and IB post better profitability numbers but all three breweries are playing in a market where consumers have a lower purchasing power and are looking to affordability. Net Income for all three breweries is well below numbers posted in 2017.

This is glaringly confirmed by its returns on equity , invested capital and net margins between 2018 till date Only Nigerian Breweries registered positive returns among the three leading brewers in Nigeria with 4.48 return on equity , 3.62 on invested capital and 2.18 in net margin ; this demonstrated the efficiency of its management 

 The above feats were achieved amidst some critical challenges that have kept dragging in the past few years. .First is  the heated competition caused by entry of the International breweries..Before this , the  Nigerian beverage market had been dominated by Nigerian Breweries Plc (NB Plc) and Guinness Plc for decades. NB Plc has nine breweries across Nigeria with two malting plants, while Gu inness has five brewing plants. This picture has since changed as Anheuser-Busch In Bev (AB InBev), the world’s largest beer producer, entered Nigeria in 2016 as International Breweries ; both the old and new generation competition  is giving   them a run for their market share.     

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