Nigerian Breweries: Down, Down Goes Profit
Nigerian Breweries Plc suffered another profit drop in 2019 from its already lowest profit in the prior year. The company also lost sales revenue for the second year despite that seasonal effect improved sales in the final quarter. The gains in sales revenue in the final quarter enabled the brewing giant to turn around from a loss within the third quarter to profit within the final quarter.
Yet the company ended the year with profit further down from the 10-year low of N19.4 billion in 2018 to N16 billion in 2019. This is less than half of the company’s profit figure in 2017 and way down from the five-year peak profit of over N38 billion in 2015.
Our full-year earnings outlook for the company at the end of the third quarter stated that “another profit drop is to be expected for the 2019 trading with after-tax profit down by 17 percent year-on-year to N12 billion at the end of the third quarter”.
In line with our expectation that the possibility of declining earnings worsening in the second half was high, the company operated the third quarter at a loss of over N1 billion and eked out N4.8 billion profit in the final quarter. Of the closing profit of N16 billion for the year, only a net of N2.8 billion or 17 percent was added in the entire second half.
This was the unfolding earnings story of the company reflected in our underscoring of its full-year profit outlook as uncertain. Uneven profit performance records of the company across quarters keep it in the region of high investment risk – the risk that actual earnings would be significantly different from the expected.
Management was unable to heal the company of weakening profit capacity – which is routed in the failing sales revenue. Brewing companies generally continue to be at the receiving end of Nigeria’s consumer market without sufficient spending power.
Declining share of brewed products in consumer spending votes has lingered for many years, which has taken competition in the business to an excessive level. In effect, companies are applying increasing marketing costs to generate declining sales revenue. Nigerian Breweries increased marketing/distribution expenses by N7.6 billion in 2019 and still lost N1.4 billion in sales revenue.
The inability to keep costs down along with declining sales revenue is the fundamental challenge for Nigerian Breweries. Rising marketing expenses are further reinforced by growing finance costs, as the company’s borrowings grew further in 2019.
Increasing costs with declining sales revenue mean that each naira drop in sales leads to a much wider drop in profit. This is the summary of Nigerian Breweries’ earnings story in 2019. The ability to convert revenue into profit declined further in the year with a net profit margin down from 6 percent in 2018 to 5 percent in 2019. It was as high as 13 percent in 2015.
Nigerian Breweries ended the 2019 operations with net sales revenue of N323 billion, which is a decline of N1.4 billion and a sustained drop from the five-year peak turnover of N344.6 billion in 2017. The margin of decline reduced in the final quarter due to the seasonal effects that propped up sales during the period. The final quarter contributed N87 billion or 27 percent of the company’s full-year sales revenue figure in 2019.
Net sales revenue for the year is 2.5 percent ahead of our revised revenue estimate of N315 billion for Nigerian Breweries at the end of 2019. It is, as expected, a drop in sales revenue for the second year after the company lost 6 percent of turnover in 2018.
Competition in the brewery industry intensified in the year and companies raised marketing expenses in order to defend market share. Self-survival strategies in a declining brewed product market hurt sales revenue as well as profit generally.
Nigerian Breweries closed the 2019 financial year with an after-tax profit of N16.1 billion, a drop of 17 percent from the 2018 figure. This is a profit drop for the company for the second year after losing 41 percent of after-tax profit in 2018.
The ability to achieve that level of profit at full year after a loss of over N1 billion within the third quarter came from a seasonal quickening in the final quarter. The step-up in sales revenue growth in the final quarter powered a turnaround to a profit of N3.8 billion during the quarter. The volatile shift in the company’s profit performance during the second half was underscored in our view that the full-year profit outlook was uncertain.
Some moderation of input cost happened in the year with the cost of sales declining ahead of sales revenue. That strengthened the marginal increase of 1.5 percent in gross profit at the end of the third quarter to 3 percent to close at over N131 billion at the end of the year.
Marketing/distribution expenses grew by 11 percent to N77.7 billion and claimed the cost-saving from input cost. A drop of 7 percent in administrative expenses was insufficient to counter the increase in marketing expenses, which led to a decline of 5 percent in operating profit to N35 billion at the end of 2019.
Finance cost was a big revenue consuming center for the company last year. Net finance cost kept on accelerating from 24 percent growth at half year to 50 percent at the end of the third quarter and further to 57 percent to stand at over N12 billion at full year. Finance income went down from its insignificant level while finance expenses grew.
Balance sheet debts expanded in the year from N42.6 billion in 2018 close to N73 billion at the end of the third quarter before closing lower at about N56 billion at the end of 2019.
Nigerian Breweries earned N2.01 per share at the end of the 2019 operations, down from N2.43 per share in 2018. It has announced a final cash dividend of N1.51 per share in addition to an interim of 50 kobo per share last December. As happened at the end of 2018, the company is again giving out all it earned in the year in a cash dividend.
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