Nigerian Breweries Plc reversed its dismal performance in the second quarter in the third-quarter yet it is headed downward for the third year running. This is in accordance with our expectation at the end of half-year that “some recovery may be expected in the third quarter, as economic activity begins to gain momentum though not likely to be strong enough to make up for the company’s disappointing second-quarter”.
As expected, there was a big rebound from a 98 per cent profit crash in the second quarter to a 229 per cent leap quarter-on-quarter in the third quarter. The quarter produced an after-tax profit of N1.35 billion against a loss of over N1 billion in the same quarter last year.
The upturn reflects the strong growth of 25.6 per cent in sales revenue for the quarter to over N82 billion and a decline/slowdown in some key expense lines. Gross profit reversed from a drop of close to 34 per cent in the second quarter to 25.6 per cent growth in the third quarter. Also, operating profit that crashed by 60 per cent in the second quarter, multiplied more than 10 times quarter-on-quarter to N7.4 billion.
Rising finance expenses remain a challenge for the company but the strong growth in operating profit changed the situation where finance expenses exceeded operating profit both in the second quarter and in the same period in 2019.
On year-on-year, Nigerian Breweries is still losing sales revenue and profit and this is sustaining for the third year running. The third quarter position, however, shows a slowdown in the rate of drop in earnings figures so far in the year.
The brewing company closed the third quarter operations with net sales revenue marginally down to N234 billion. This is nevertheless a strong gain in momentum in the third quarter from a drop of roughly 11 per cent year-on-year at half-year.
Inability to improve sales revenue remains the centre of the company’s challenges and this has been on since 2018. Based on the third-quarter growth rate, the full-year turnover is expected to remain well below the all-time high of N344.6 billion the company posted in 2017.
The company is still headed for an accelerated drop in profit this year. It closed the 2019 operations with a drop of 17 per cent in profit, which accelerated to 31 per cent in the first quarter, 58 per cent at half-year but slowed down to 43.5 per cent at the end of the third quarter.
The half-year closing profit of N5.59 billion went up to N6.94 billion at the close of the third quarter operations in September. The lowest profit figure in several years seems to be brewing for Nigerian Breweries in 2020.
A profit drop of over 43 per cent against a slight decline in revenue points to rapidly growing costs. Two major cost lines of the company are responsible – administrative and finance expenses, which claimed increased proportions of revenue during the period.
Administrative cost rose by 11 per cent year-on-year to nearly N16 billion at the end of the third quarter, claiming roughly 18 per cent of gross profit compared to below 15 per cent in the same period last year.
Finance expenses maintained the lead for rising costs at a year-on-year growth of over 43 per cent to the region of N12 billion at the end of the third quarter. A decline in finance income pushed net finance expenses up by about 45 per cent to N11.5 billion at the end of the period.
The rising cost of finance reflects increased dependence on bank borrowings this year. Total balance sheet debts have grown well over two times from N56 billion at the end of 2019 to over N133 billion at the end of the third quarter, down however from N139 billion at half-year.
The company’s management was able to keep input cost in check in the third quarter, as it did not make a further encroachment on sales revenue. Another favourable development on the side of costs came from marketing and distribution expenses, which dropped by 9 per cent year-on-year to N52 billion over the review period.
The cost savings were more than countered by the other cost increases, leaving margins squeezed across the board. Net profit margin dropped from 5.2 per cent in the same period last year to less than 3 per cent at the end of the third quarter. The company hasn’t seen profit margins this low in more than a decade.
The outlook for the final quarter of the year continues to reflect constraints in sales while costs are likely to keep eroding margins. The accelerated drop in profit may therefore follow the company to a full year.
Nigerian Breweries earned 87 kobo per share at the end of the third quarter operations, down from N1.53 per share in the same period last year.
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