Champion Breweries Plc: A much better year

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Introduction

The 2016 financial year was quite a profitable one for Champion Breweries Plc. It was able to increase the tempo of its revenue generation and made more sales during the course of the year. The company was then able to sustain the momentum of its income generation down to its profit level, and had a substantially higher level of profit when compared to that of 2015.

This immediately led to better profitability ratios and a better earnings per share. This however did not translate into dividend for shareholders. We are however of the opinion that while the 2017 financial year will still be a profitable one for Champion Breweries Plc, we still cannot tell if this will result in dividend payment to shareholders.

Core operations

The brewery earned a little more revenue in 2016 than it did in 2015, as compared to the prior year when it made less revenue than 2014. Meanwhile, it also spent a little more on cost of sales in 2016 to achieve the level of sales that it did. Revenue for the year was N3.86 billion, 10.3 per cent more than the N3.5 billion recorded in 2015.

One other good thing is that Champion Breweries was also able to effectively curtail its administrative and other operational costs during the course of the year, cutting such costs by almost half. Thus, it had a commendable pretax profit of N637 million, a whopping 156.9 per cent more than the N248 million recorded in 2015. It also achieved a 588.3 per cent growth in after tax profit during the course of the year, with the after tax profit swelling to N530 million.

Earnings per share (EPS) was thus predictably higher than those of the prior year. At 7 kobo, the EPS was 600 per cent higher than the 1 kobo recorded before. Meanwhile, the brewery did not declare any dividend, just like it didn’t do in the preceding year.

 

Profitability ratios

Because of higher revenue and profit profiles for the year, profitability ratios took an upward swing during the course of the year. For the year, the company recorded a profit margin of 16.5 per cent, higher than 7.1 per cent in 2015. Analysis shows that for every N100 earned by the company in the course of the year, it recorded a profit of N16.50, as compared to a profit of N7.10 in the preceding year.

As per return on assets (ROA) and return on equity (ROE), the company performed better in 2016 than it did in 2015, and the results it recorded are still high enough to be commended. ROA for the year was 6.4 per cent, up from 2.4 per cent in the prior year, but not as high as the industry average for 2016. ROE was 6.9 per cent in 2016, up from 1.1 per cent in 2015 but lower than what most other companies recorded for 2016.

Perhaps because of the harsher Nigerian economic climate, the company employed fewer employees during the course of the year and its employee number decreased to 171 to 126. It paid N94 million to 39 employees as termination benefits during the course of the year. Earnings per employee then improved to N30.63 million on the average, up from N20.47 million in 2015. This is indicative of employee productivity and company efficiency.

 

Other ratios

Not only did Champion Breweries have a better capital adequacy in 2016 than it did in the prior year, the result also overshot the industry average for the period.  At 98.9 percent, and slightly higher than the 98.2 per cent result recorded in the prior year, the brewery’s result remains high and suggests that its financial strength in the future is unshakeable.

The company however bucked the common trends of the manufacturing industry for the 2016 financial year in terms of current ratio. It departed from the rule of most companies having high current ratios with a current ratio of 0.98 times.

Having a debt to equity ratio of 0.30 shows that the company is using only 30 kobo of liabilities in addition to each N1.00 of stockholders equity. In other words, the company is using N1.30 of total capital for every N1.00 of equity capital, a little lower than the result it achieved in 2015.

 

Sustainable growth

Champion Breweries recorded a distributable profit of N530 million in 2016, and retained all of it, comparable to a retention ratio of one in 2015. With a profit margin of 16.5 per cent, a retention ratio of 1, an asset turnover of 0.39 times and an asset to equity ratio of 1.3, the company had a sustainable rate of 8.3 per cent. This means that using only the resources it generated, the company had the capacity to grow by 8.3 per cent during the course of the year. It was however able to grow by a slightly higher 10.3 per cent, which means achieved and then surpassed its inherent capacity for growth. This is a departure from the preceding year when it did not achieve its inherent capacity for growth.

 

Stock value

The Champion Breweries stock sold at N2.05 as at our analysis date of November 24 2017. Our analysis determines that it is overvalued at that value. First, nets assets per share is 98 kobo, lower than the current market price. Secondly, the book value to market value ratio is much less than one, another clear indication of overvaluation. While book value is N7.67 billion, the market value is N16.1 billion. It is obvious that the company is worth less in reality than the price it is currently trading at.

This is even worse news for the investor because this is a stock that doesn’t pay dividend always.

 

Unaudited results

From our analysis of the company’s half year result, the 2017 financial looks like it’s shaping up to be a great one for the company. Not only was it able to step up the tempo of its income generation (turnover grew by 23.2 per cent to N1.18 billion), the residual effect also got to pre tax profit level. Pre tax profit was N66 million, and this was a vast improvement over the N30 million profit recorded in the corresponding period in the past year.

The profit margin for the period was 5.6 percent, and this was much better than the 3.1 per cent recorded in the erstwhile year.

 

Unique strategies

The Company was incorporated in Nigeria as a limited liability company in 1974 and was later converted to a public limited liability company in 1992. The Company’s principal activities continue to be brewing and packaging of Champion Lager Beer and Champ Malta as well as provision of contract brewing services to Nigerian Breweries Plc, a related party within the Heineken group.

 

Conclusion

Our analysis shows that the Champion Breweries stock is not one that pays dividend, so it is not an ideal stock for the investor who is interested in a regular dividend income.

*Source: Champion Breweries’ 2016 financial report

*Champion Breweries’ 2017 half year unaudited results

*The Nigerian Stock Exchange

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