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Published On: Fri, May 19th, 2017

Will Nigerian Breweries Really Underperform?

(Independent) At a time when the Nigeria Breweries stock is beginning to get back its groove, analyst say the stock will underperform the market despite outperforming closest rival Guinness on the Nigerian bourse.
Selling for N148 on Tuesday May 16, the stock attained the highest price in more than a year on the back of improved first quarter performance. The stock underperformed the market in the last six months, delivering returns of 5 percent compared to 10 percent of the All Share Index (ASI). But over the last twelve months, the stock has delivered returns of 20 percent compared to 5 percent of the ASI.
Compared to rivals Guinness and International Breweries, Nigeria Breweries has a better tale to tell; while NB has delivered 20percent in the last twelve months, Guinness has delivered negative returns of 30percent while International breweries has delivered 10 percent.
The poor showing of the industry is a reflection of weak demand occasioned by the recent recession which hit the economy, the first in 25 years. It is also due to pressure from a weak naira as the industry has a strong dollar demand owing to high external raw material inputs.
“Devaluation of naira and inflation continues to put pressure on import prices,” he said, while emphasising that the “fundamentals remain positive in the Nigerian market”, said Nicolaas Vervelde outgoing MD/CEO of the makers of Star Lager beer.
Analysts’ advice that investors hold their position in the stock even if they are of the opinion that it would underperform. According to the Financial Times, “as of May 12, 2017, the consensus forecast amongst 9 polled investment analysts covering Nigerian Breweries Plc advises that the company will underperform the market. This has been the consensus forecast since the sentiment of investment analysts deteriorated on Oct 13, 2016. The previous consensus forecast advised investors to hold their position in Nigerian Breweries Plc.
“The 10 analysts offering 12 month price targets for Nigerian Breweries Plc have a median target of N114.50, with a high estimate of N147.00 and a low estimate of N98.10. The median estimate represents a -21.04% decrease from the last price of N145.00.
This is a way of saying that the stock is overpriced and is in line for some correction in the short term.
Meanwhile, the brewer posted solid financials in the first quarter ending March 2017 with revenues spiking 17.7 percent to N91.3 billion compared to N77.55 billion attained in the equivalent quarter in 2016. But a fast paced Cost of Goods sold prevented a significant rise in Gross profit relative to the equivalent quarter. The figure grew by a marginal 9 percent to N40.5 billion from N37.2 billion. Cost of Goods sold was N50.72 billion compared to N40.27 billion of the equivalent quarter.
Operating profits were slow growing to N19.2 billion from N17.99 billion to indicate that operating costs need to be tamed further; admin expenses are still at the previous levels while marketing and distribution expenses dropped by less than N3 billion in the period.
Finance costs were managed down a significant 40.6 percent from N3.05 billion to N1.81 billion. It is recalled that finance costs has been the company’s Achilles. In the half year of 23016, net finance cost for the brewer jumped by a hefty 447 percent in the period to N5.41 billion from N987.66 million to indicate a growing interest payments burden. The rise contributed to shrinking pre-tax and net profit in the period. Pre-tax profit sank to N8.6 billion from N11.4 billion.
But in the first quarter under review, falling finance cost helped the N2 billion addition in pre-tax profits from N15 billion to N17.44 billion. Net profit was little helped by the N5.98 billion income tax, which ebbed at N11.5 billion from N10.5 billion, an improvement of only N1billion.
With regards to the margins, the brewer with headquarters in Iganmu, Lagos failed to match the showing in the equivalent period as they shrank in the period. Gross profit margin shrank to 44.4 percent from 48.1 percent to indicate dwindling control of factory costs while pre-tax profit margin stunted to 19.1 percent from 19.3 percent to show a slight fall in ability to reign in variable costs. Net Profit margin slowed to 12.5 percent from 13.5 percent to indicate that were the company used to eke out 13 kobo from every naira as profit, it only now scrapes 12.2 kobo.
Going forward, as the Central bank of Nigeria gets a better handle of the forex situation, cost of inputs would be whittled down to help the brewery industry get a handle of their costs. In addition, as the economy comes out of recession, and inflation slows, demand is likely to improve several notches to help brewers back on track. Nigerian Breweries is likely to ride macroeconomic improvement to better performance.

This article first appeared in Independent Newspapers

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