Nigerian Breweries (NB) Plc recorded a strong first quarter (Q1) ended March 31, 2021 performance raising hopes for a big recovery this year from a deep plunge the company recorded in 2020.
Last year marked three years of sustained profit drop for the company that set profit down below the 2005 level. The company’s Q1 2021 performance seems to make a promise or reversing the sharp fall of 2020 to a big leap in the current financial year.
NB pushed forward towards recovery in the first quarter but the challenge of rising input cost has remained. The brewing company built an after tax profit of N7.6 billion in the first quarter — which has already exceeded the full year profit figure of N7.4 billion in 2020.
The strength of the upturn in the Q1 is rooted in improving sales revenue. Inability to grow sales revenue has ruled the company’s operations over the past three years. The company pushed up sales revenue a clear 27 per cent year-on-year in the Q1 2021 from four per cent increase in 2020. This represents a gain of N22.5 billion in sales revenue over the period.
The challenge for the company remains the inability to contain rising cost of sales. There is an imbalance in the growth of sales revenue and the cost of producing the unit of sales, which continues to undermine the company’s profit performance.
Cost of sales rose ahead of sales revenue in the first quarter at close to 37 per cent to stand at N66 billion. The company could not pass a good part of the increase in sales revenue down to profit. Input cost per naira of sales revenue was as high as 62 kobo in the first quarter compared to the company’s historic ratio of 50 kobo.
The management of NB was, however, able to pass part of the increase in sales down to gross profit — which provided the spur for profit recovery in the Q1 2021. Cost of sales grew by N17.7 billion over the review period against the N22.5 billion gain in sales revenue.
Despite the strong growth in cost of sales in the first quarter, it represents a strong slowdown from the records of last year. Cost of sales had grown by close to twice the increase in the company’s sales figure in 2020.
Reflecting the slowdown in cost of sales, there is a change of direction for NB from a drop in gross profit last year to an increase in the first quarter. The Q1 2021 trading closed with gross profit of roughly N40 billion, which is an increase of 13.7 per cent year-on-year.
Improvement in other income and moderated growth in key expenses reinforced the improvement in gross profit. Other income more than doubled at 103 percent to N368 million over the period.
Marketing and distribution expenses increased moderately at five per cent to a little below N20 billion in the Q1 2021 and administrative cost closed flat at N5.7 billion over the period. These developments boosted the company’s profit capacity in the Q1 2021.
NB recorded an operating profit of N14.5 billion in the first quarter, which is an increase of about 33 per cent year-on-year. This is a reversed movement from a drop of 16 per cent in operating profit at the end of 2020.
Another major challenge that has remained for NB this year is rising cost of finance. An increasing trend in finance expenses recorded last year continued in the first quarter, growing by 13 per cent to N3 billion at the end of the period.
However the proportion of operating profit claimed by net finance expenses has dropped from 61 per cent at the end of last year to less than 21 per cent in the first quarter. Increased finance cost was the biggest undermining factor to the company’s profit performance in 2020.
Going by the company’s pattern, it is likely that finance expenses would accelerate in the course of the financial year. While the company began last year with a net finance cost of N2.6 billion in the first quarter, the figure raced up to over N18 billion at the end of the year.
Despite some reduction in borrowings from over N91 billion last year, balance sheet debts remained relatively huge at N73 billion at the end of the Q1 2021. A further deleveraging of the balance sheet in the course of the financial year is also not ruled out in view of a major improvement in the company’s cash flow position.
The company’s profit of N7.6 billion for the first quarter represents a year-on-year growth of about 39 per cent. The profit rebuilding blocks are an accelerated growth in sales, moderating input cost and a slowdown in finance expenses. These factors as well will define the company’s position on the recovery and growth path in 2021.
Increase in cost, erode profits last year
NB in 2020 financial year reported another decline performance in terms of revenue and profit but the management was prudent in terms of dividend payout to shareholders.
The hike on NB’s Interest expense on lease liabilities and net loss on foreign exchange transactions eroded the profit in the year under review.
The company in its 2020 financial year results did not report excise duty numbers introduced by the federal government in 2019.
With about 54.3 per cent decline in profit, the management of NB declared a final dividend of N0.69 Kobo per ordinary share of 50 kobo each. The management had declared interim dividend of N0.25.
The company said as at December 31st, 2020, a N0.9 billion (2019: N1.5 billion) total dividend payable is held with the Company’s registrar, First Registrars and Investor Services Limited.
The remaining dividend payable of N6.8 billion (2019: N4.2 billion) holds 2.4 million (2019: Nil) due to foreign shareholders. The total remaining balance of N6.8 billion represents unclaimed dividends.
The management had proposed a total dividend of N3.73 kobo per share after (2017: N3.13 kobo per share) based on the issued share capital of 7,996,902,051 ordinary shares of 50 kobo each subject to approval by shareholders.
The company in 2016 proposed N3.58 dividend, 0.6 per cent or N0.02 below N3.60 dividend that was paid to shareholders in 2015.
However, the balance sheet structure of NB remained stable with in total assets and decline in total equity
Weaker revenue, weaker profitability
NB reported net revenue of 4.3per cent from N323billion in 2019 to N337 billion in 2020. Nigeria is the primary geographical segment with per cent of the group net revenue is generated.
The company reported 4,4 per cent increase in net revenue generated in Nigeria to N336.9billion in 2020 compared to N322.81billion reported in 2019 while Export’s net revenue dropped by 27.5 per cent to N143.9million in 2020 compared to N198.5million reported in 2019.
The company in 2016 took phased price increases, in a move to partially protect margins amid galloping cost inflation (imported and local) and increased share of low-margin brands in the sales volume mix.
The Cost of Sales (COS) rose by 13.9 per cent from N191.76 billion in 2019 to N218.4billion in 2020, leading to per cent proportion of COS/Revenue in 2020 as against per cent reported in 2019.
Consequently, gross profit dropped by 9.8per cent from N131.65billion in 2019 to N118.69 billion in 2020. NB’s Non-core business income also dropped by 17.6 per cent to N838million in 2020 from N1.01billion in 2019.
Meanwhile, total operating expenses that comprises of distribution/ administrative, dropped by 9.7 per cent to N89.9billion in 2020 from N97.06billion reported in 2019.
The breakdown of total operating expenses showed that marketing and distribution expenses dropped by 9 per cent to N70.7billion in 2020 as against N77.7billion reported in 2019 while administrative expenses closed 2020 at N19.2billion as against N19.36billion reported in 2019.
Elsewhere, finance income dropped by 5.5 per cent from N260.7million in 2019 to N246.28million reported in 2019 as finance costs surged by 50.8 per cent from N12.11 billion in 2019 to N18.03billion in 2020.
Higher finance costs were due to N4.17 billion interest expenses on lease liabilities in 2020 as against N19.7million reported in 2019 while net loss on foreign exchange transaction rose from N1.47billion in 2019 to N4.77 billion reported in 2020.
In all, Net finance costs of NB rose by 52 per cent to N18.03billion in 2020 as against N11.85billion in 2019.
However, NB’s profit before tax closed the full year at N11.58billion, 50.4per cent below N23.35billion posted in 2019. With about 41.9per cent decline in tax expenses, profit after tax stood at N7.3billion in 2020 from N16.11billion recorded in the erstwhile year results.
The company’s reported 51.7 per cent decline in Basic Earnings Per share to N0.97 as against N2.01 reported in 2019. The underlying fundamental of the company dropped significantly in the year under review. (Earnings per share / declared dividends per share dropped from N0.86 to N0.53 in 2019.
For the period under review, NB’s profit Margin dropped from 7.22 per cent to 3.4 per cent in 2020 while gross profit moved from 3.36 per cent to 2.59 per cent in 2020.
In addition, the company reported 4.57 per cent Return on Equity in 2020 as against 9.6 per cent in 2019 while Return on assets closed 2020 as 2.6 per cent compared with 3.37 per cent in 2019.
Financing Structure
NB’s total assets rose by 16.5 per cent from N382.8billion in 2019 to N445.86billion in 2020. Current assets that gained 28.4 per cent to N93.2billion in 2020 from N72.5billion in 2019 was the major driver of total assets in 2020.
Non-current also gained 13.67 per cent to N352.66billion in 2020 from N310.26billion reported in 2019.
Meanwhile, total equity dropped by nearly four per cent from N215billion reported in 2019 to N161.2billion in 2020.
Non-current liabilities dropped by 15.2 per cent to N74.2billion in 2020 from N87.5billion in 2019 while current liabilities rose by 65 per cent to N210.5billion in 2020 from N127.53billion reported in 2019. In addition, total liabilities rose by 32 per cent to N284.7billion in 2020 from N215billion in 2019.
NB in its financial statement said, “The Company has revolving credit facilities with five Nigerian banks to finance its working capital. The approved limit of the loan with each of the banks range from N6 billion to N15 billion (total of N 66 billion). Each of the agreements were signed in 2016 with a tenor of five years.
“The Bank of Industry (BoI), a Government Parastatal, provides mid to long term financing for establishment, expansion or diversification of large, medium and small projects which may be new or existing. The Company obtained Capital and Working capital finance from the BoI in 2019.
“The loan has been recognised at fair value in line with the provisions of IAS 20. Included in Bank Loan obtained/(repaid) during the year is related deferred income amounting to N1.8 billion (2019: N2.5 billion), of which N 278 million has been released to income statement in 2020 (2019: N87million), and no new capitalisation in 2020 (2019: N 2.1 billion).”
Conclusion
NB had a struggling year in all-parameters that impacted on it actual performance in 2020. The company continued to feel the adversely impacted of excise duty rates coupled with competition with other breweries companies operating in the country.
All through 2020, the operating environment remained a challenging one as the year witnessed reduced consumer purchasing power and increased cost of doing business mainly due to inflation.
Notwithstanding, the company focused on its through cost leadership and market Leadership supported by Innovation that helped to maintain strong results and deliver good return on investment to shareholders.
In 2014, the company concluded the legal process which culminated in a merger with Consolidated Breweries Plc resulting in an enlarged company. As expected, this merger added the company’s strategize on market expansion and varieties. The future outlook depends on the commitments and choices made by the board and management in terms of attracting more liquidity and increased business operations.
NB was incorporated in 1946 and is currently the leading brewer in Nigeria by market share.