International Breweries Plc: Gaining grounds but tougher times ahead

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Introduction

International Breweries Plc seemed to be exempt from the ravages of the Nigerian economic recession of 2016, recording a higher turnover and better profits in 2016 than it did in 2015.

Profitability ratios for the company were better than that of the preceding year as well as those recorded by other companies. We however predict that the 2017 financial year will be a much tougher one for International Breweries, and one not as profitable as its 2016 financial year was. Its unaudited reports towards it 2017 FY shows that it has tougher grounds ahead to traverse. Its available first quarter results already show a substantial loss, and it might be unable to reverse this and post a profit at the end of the year.

 

Core operations

Unlike many bigger brewing companies, International Breweries had a relatively good year in 2016 in terms of sales generation and profit retention. First, it was able to make more revenue for the year under review (turnover for the year grew by 13.1 per cent to N23.3 billion from N20.6 billion). Then it was able to maintain this growth momentum up to the profit level. The company was able to achieve the growth in turnover by offering Nigerian consumers, who had a decreased purchasing power during the period under review, cheaper brewery products options.

 

Growth of rate of cost of sales, at 8.4 per cent, was very mild and did not have a dampening effect on the company’s profit. Growth in marketing and distribution expenses was also manageable. The company therefore declared a pre-tax profit of N3.7 billion and an after-tax profit of N2.7 billion. Both were significantly higher than the levels recorded in 2015. Pre-tax profit had grown by 32.1 per cent while after-tax profit grew by 42.1 per cent.

Earnings per share, was as projected higher than that of the preceding year. Earnings per share was 81 kobo, as compared to an earnings per share of 59 kobo before. Dividend per share in 2016 was 35 kobo, 40 per cent higher than the 25 kobo recorded in 2015.

 

Profitability ratios

With higher profits, it was imperative that International Breweries’ profitability ratios for 2016 improve. For the year, it recorded a profit margin of 15.9 per cent, higher than 13.6 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 N15.90, as compared to a profit of N13.60 in the preceding year.

Assets deployed also got a higher return in 2016 than it did in 2015. Return on assets for the year stood at 11.0 per cent in 2016, as compared to a return on assets of 9.3 per cent in 2015. The same was the case for return on equity (ROE). For the 2016 financial year, International Breweries recorded an ROE of 19.3 per cent, higher than 15.6 per cent in the erstwhile year, translating to mean that the company made an after-tax profit of N19.30 on every N100 worth of equity employed, an improvement on the N15.60 made in 2015.

Also, the company had better earnings per employee during the course of the year. Earnings per employee was N44.1 million in 2016, up from N42.2 million in the prior year.

 

Other ratios

For the year, International Breweries had a better capital adequacy than it did in 2015. Its shareholders’ funds could finance a higher 79.8 per cent of its total capital for its 2016 financial year, higher than the 60.2 per cent recorded in 2015. The result recorded was also on par with what was obtainable in the industry for the period under review.

Current ratio, which measures whether or not a firm has enough resources to pay its debts over the next 12 months, was 0.51 times, lower than 0.73 before. This was contrary to what was obtainable in the manufacturing industry in 2016 where most companies had current ratios higher than one. The company also bucked the trend in terms of debt to equity ratio, recording one of the lower ones in the manufacturing industry for the period.

Having a debt to equity ratio of 1.39 shows that the company is using only N1.39 of liabilities in addition to each N1.00 of stockholders equity. In other words, the company is using N2.39 of total capital for every N1.00 of equity capital. This was also a little lower than the N2.48 result the company recorded in 2015.

 

Sustainable growth

For the review year, the company recorded a profit of N2.65 billion, and dedicated NN1.15 billion to the payment of dividend shareholders. It retained 57 per cent of its profit to put toward the company’s expansion.

With a profit margin of 15.7 per cent, an asset turnover of 0.69 times, and am assets/equity ratio of 2.4, the company had a sustainable growth rate of 14.8 per cent for the period under review. This means that the company had a 14.8 per cent inherent capacity for growth during the course of the year, higher than 13.3 per cent in 2015. This is surprising especially in the light of Nigeria’s economic recession and a reduced consumer purchasing power. The company however experienced an actual growth of 12.7 per cent, close to but yet lower than its sustainable growth rate.

 

Stock value

The International Breweries stock is by no means a cheap stock. Even though it cost the least among brewing stocks in Nigeria, at a current market price (on April 21 2017) of N17.50, the stock is typically overvalued. Net assets per share was N4.25, just a fraction of the current market price and this therefore suggests that the stock is overvalued.

The company is also worth much less in reality than it is selling for on the NSE at now, as shown by a much higher market value as compared to its market value. While book value is just N14 billion, current market capitalisation is a much higher N53 billion. This also, is a sign of overvaluation.

This is an expensive stock, and might not be an easy buy for prospective investors due to the large capital outlay that may be involved. We do not recommend a buy of this stock right now.

 

Unique strategies

International Breweries Plc was incorporated in 1971 first as a Limited company, commencing production of its flagship product Trophy Lager in December 1978 with an installed capacity of 200,000 hectoliters per annum. In 1982, the Company embarked on an expansion programme to increase its capacity to 500,000 hectoliters annually, and was listed on the floor of the Nigerian Stock Exchange in April 1995.

In 2008 a turnaround strategy was implemented and the company successfully raised funds from the Nigerian Capital market. This funding started the resurgence of the organization and its brands. That same year, the Warsteiner Group sold its majority shareholding to the Castel Group and in January 2012 SABMiller Plc entered into a strategic alliance with the Castel group. During this period significant investment was made which transformed the company and provided it with a solid foundation for growth and profitability. Starting with just two brands, Trophy Lager and Betamalt the company has since 2010 introduced Grand Malt, La Voltic water, Hero Lager, Castle Milk Stout, Castle Lager, Miller Genuine Draft, Redds, Eagle and most recently 1960. These products provide a cheaper alternative for the Nigerian populace and continue to gain in popularity.

 

2017 Q1 result

The brewing company’s newly released 2917 quarter one report shows that it is now feeling the bite of Nigeria’s economic recession, just like many other companies already are. Its 2017 financial year does not look like it’s shaping up to be a great one for both company and its shareholders. It did record a slightly better turnover than the corresponding period in 2016, but the company had a much higher cost of sales. Loss for the period was therefore N2.1 billion, a sharp departure from the profit of N530 million recorded in the corresponding period in 2016.

Instead of earnings per share, there was a loss per share. This will most likely affect investors with regards to dividend receipt come end 2017.

Conclusion

While investors may not expect a dividend from their holdings come year end 2017, they will do well to hold on to their investments in hopes of capital gains and appreciation years down the line.

*Source: International Breweries’ 2016 financial report

*The Nigerian Stock Exchange

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