Analysis: Nigerian Breweries, the glory days are gone

The year is 2013 and Nigerian Breweries did something quite remarkable. It just reported a profit after tax of N43 billion and a return on equity of 41.9%. That year, Nigeria Breweries also reported revenues of N268.6 billion and paid over N34 billion in dividends. Also, it had just N9 billion in external debts in 2013. Those were the good old days.

These days, however, the story is somewhat underwhelming and every year it gets worse. In 2019, the brewery giant reported a profit after tax of N16 billion from revenue of about N323 billion only. Return on equity is 11.54% while dividends are just about N18 billion. The directors of the company have recommended that they pay out the entire profits and even more as dividends. It now has about N55 billion in total external debts in 2019.

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Nigeria’s brewery sector is facing a potential implosion with intense competition, harsh economy, unfavourable government policies and changing taste of consumers haemorrhaging top and bottom line. Despite splashing the cash on brand ambassadors like Burna Boy and spending billions on events and advertisement, it is still finding it extremely difficult to get younger Nigerians to embrace its 21 flagship brands.

Revenue has grown by over N100 billion since 2013 but it has come at a significant cost to the business. Last year (2019), the company reported that it had spent about N77.6 billion on marketing and distribution expenses, a whopping 24% of revenue. It spent 19.5% of revenue on marketing and distribution expenses in 2016 and 15.9% in 2013, its year of profits. Marketing and distribution expenses have almost doubled from N42.9bilion to N77.6 billion in 6 years.

But what else can the company do? It can’t just fold its arm against stiff competition and watch its market share and inventors confidence erode. Management probably once in while takes solace at the performance of Guinness, thanking their stars (no pun intended) that they are much better. It’s brutal out there and the beer makers know it’s only going to get worse. Who knows who will be left standing 10 years from now? For Heineken, its majority shareholder, it keeps investing and taking a pint of their return.

The parent company with 55.9% ownership of the company will get about N10 billion out of the dividend of N18 billion. In addition, it earns royalties and technical fees of N7.2 billion or 2.2% of revenues but 45% of profits as royalty and technical fees.

Back to 2013, the company paid N9.36 billion (3.4% of revenues or 21.7% of profits ) as royalty and technical service fees. Shareholders will be reminded quite clearly that the parent company continues to invest heavily in its Nigerian subsidiary.

About N30.1 billion was spent in 2019 (N30.3 billion in 2018) on property plant and equipment out of which “returning packaging materials” was N10 billion. To date, the company has spent N125 billion out of its N446 billion property plant and equipment in returning packaging plant and equipment. Only Plant and Machinery at N189 billion is worth more. Suffice to add that it’s the current market valuation of N411 billion is just 1.07X total assets and 2.45X net assets.

It’s thus petrifying to be reminded that at N55 per share and 25x price to earnings ratio, Nigeria Breweries stock may well be overvalued. It’s is highly unlikely that it will grow its earnings per share that aggressively. Despite paying its entire profits as dividends and more, its dividend yield will be 5% at the current share price of N55.

Year to date, the stock is down 12.7% and could likely remain depressed amidst a rather gloomy economic outlook. With inflation skyrocketing and disposable income of consumers taking a hit, the horizon for Nigeria Breweries is nowhere near its glory days.

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