By Emeka Anaeto, Economy Editor
It appears investors are no longer sure-footed on Nigerian Breweries Plc, NB, following conflicting signals from the last nine-month results, 9M’16.
Though huge volumes of the stock are traded daily on the Nigerian Stock Exchange, NSE, the share price dynamics became transfixed at N141 for over three weeks now. It had recorded a downwards movement shortly after the interim results was announced, from a high of N146.
However, the stock still maintains one of the few positive year-to-date, YtD, performances in the NSE in recent weeks. The YtD which stood at 13 per cent just before the 9-months result had gone down to 9.13 per cent a week after.
Stockbrokers indicated that with the weak top-line and negative bottom-line reported for the 9-months ending September 30, 2016, the stock should have gone into negative YtD. But they attributed the quick bottoming out to a sustained strong fundamentals of the brewing giant.
Again, apparently in a show of confidence amidst a plunge in profit, NB had declared an interim dividend of ¦ 1 per share which implies a dividend yield of 0.7 per cent using last trading price of ¦ 146 before the result was announced. Only a few companies could do this so far this year.
NB’s unaudited 9M‘16 financial statements show revenues increased 3.6 per cent year-on-year, YoY, to ¦ 223 billion while Profit Before Tax, PBT, declined 26 per cent YoY to N37 billion.
But disaggregating to third quarter, Q3’16, specific, the result reveals significant deterioration in earnings with PBT and PAT plunging 66 per cent and 78 per cent YoY to N2 billion and N1 billion respectively.
Also on a quarter-on-quarter, QoQ, basis, Q3’16 revenue (instead of increase) actually slumped by 18.1 per cent to N65.3 billion, contributing 29.3 per cent to 9M’16 aggregate revenue compared to 34.8 per and 35.8 per cent in Q1’16 and Q2’16 respectively.
Moreover, higher revenue was expected by industry observers as NB effected a second product price increase during the Q3‘16 just as the 9M’16 should have reflected the price increase effected in June. But this signifies that the price increases actually undermined volume sales, and probably market share.
Nevertheless, the price increases were inevitable in the larger macroeconomic circumstance, and in defence of NB’s bottom-line.
But the company still recorded a huge drop in bottom-line underpinned by increased pressure on margin with a 13 percentage point drop to 36 per cent YoY.
Though NB’s substantial local raw material sourcing should have saved it from the escalating foreign exchange related margin pressures which other manufacturers have suffered in the past one year, some industry analysts believe NB was equally exposed to pressures from elevated domestic cereal prices where prices of the three key inputs, sorghum, maize and refined sugar rose 66, 70 and 83 per cent respectively.
Analysts also identified a rising share of lower margin value beer in NB’s sales mix heaping more pressure on the gross margins.
The 9M’16 result indicated that NB had made significant effort to rescue the margin from crushing costs, hence a 49 per cent YoY cut in administrative expenses led to significant decline (-12% YoY) in OPEX.
In addition, there appeared to be a major positive shift in NB’s funding mix as it recorded a significant moderation in Q3’16 net finance costs which declined by 67.2 period QoQ to N1.7 billion, despite increases in cost of funds in Nigeria’s financial market during the period. This heading had witnessed huge increase in the previous quarters and in the overall 9M’16 results.
Looking at short to medium term fortune of NB investment analysts at FSDH Merchant Bank Limited stated: “The drop in profit margins is a reflection of the macroeconomic environment “Expected seasonal revenue hike in Q4 2016 may be eclipsed by persisting macroeconomic issues.”
But analysts at ARM Investments Limited, a Lagos based investment house, stated: “Going into Q4 ‘16, we believe the impact of the price hike should reflect in NB’s traditionally strong Q4 ‘16.
“That said, amidst persisting weakness in demand, we lower our 2016E projections and now expect sales of ¦ 306 billion (+4% YoY), 1.3% lower than our initial forecast of ¦ 310 billion.
“In terms of input costs, the combination of higher domestic cereal prices and feed-through from Naira weakness on imported raw materials (aluminium cans and barley) should keep input costs elevated.
“In addition, margin displacement from higher share of value beer in sales mix points would tamer gross margins in Q4 16. “Consequently, we have lowered our gross margin forecasts for NB to 43% YoY from 49% previously.
“We also revised our projections for FY 2016E interest expense higher (+53.6% YoY) to N11.8 billion to capture NB’s elevated interest expense over the year (9M 16: N10.5 billion). “Cumulative impact of these adjustments lowered our 2016E Earnings Before Interest and Tax, EBIT and Profit After Tax, PAT, forecasts to N52 billion and N38 billion respectively (vs. N64 billion and N41 billion previously).”
Reacting to inquiries from Vanguard Investment Reports NB’s Corporate Affairs Adviser, Mr. Kufre Ekanem, stated: “The devaluation of the Naira and increase in inflation impacted our input cost. Volumes sold also decreased as a result of lower consumer purchasing power in the period.”
On the significant rise (doubling) in net finance costs he stated: “this came about as a result of the revaluation of foreign currency denominated payables, (Naira to Dollars), which rose from about N200 to the Dollar in June to over N300 to the Dollar in September”.
He also said the increase in borrowing cost (interest rate) impacted interest expenses leading to the upsurge recorded in the period.