NB: DIVIDEND CUT AMIDST GLIDING REVENUE, PROFIT, HIGH OPERATING COSTS

Nigerian Breweries management last week made available its full year earnings report for the period ended December 31, 2016 to the investing public slightly late, compared to the released date of 2015, but in keeping with its post-listing requirements to be among the early fillers on the exchange.  

The company remained resilient for the period under review,despite the fact that the top and bottom-lines were mixed to reflect the low disposable income of Nigerians due to the prevailing economic recession. This becomes more glaring when considered against the backdrop of the stiff competition and saturation in its industry with all other operators posting loss accounts in their full year and quarterly accounts. 

NB’s 2016 scorecard revealed a marginal rise in sales revenue to N313.74 billion,up by 7%,compared to N293.91 billion in 2015,while profitability level for the period fell by 25.33% to N28.42 billion from N38.06 billion in the preceding year.  The company’s net assets decline marginally by 4%from N172.24 billion in 2015 to N165.83 billion. 

Similarly,Earnings Per Share for the period fell to N3.76 as against the comparable period of 2015 level of N5.03 EPS, following which investors' waiting period increased significantly to 30.61x from 20.24x. This was not however a result of its falling earning, as it yielded 3.37% of the market price as at released date is below the 4.94% yield estimated in 2015. 

The high cost of sales and financing increased 19% and 66.06% respectively on the back of the increasing costs of importing raw materials, resulting from the volatile foreign exchange rates which escalated the cost of production, eating into its profitability. 

The company's mixed performance was attributed to the fact that during this financial year it operated in an even tougher economic environment that was worse compared to that of 2015. The negative impact of the rising core inflation eating into consumers' disposable income and consequently shrinking demand has shown on the marginal increase in sales.

NIGERIAN BREWEARIES   PLC
FULL YEAR ENDED DECEMBER, 31, 2016
COY	2015	2016	% Chg
	(N)	(N)
Date Released	February 11, 2016	February 20, 2017
Price at Released Date	101.86	115.00	12.90
Revenue	293,906,000,000	313,743,000,000	6.75
Profit After Tax	38,056,000,000	28,417,000,000	-25.33
Net Assets	172,239,000,000	165,829,000,000	-3.75
Dividend	3.60	2.58	-28.33
ESTIMATED RATIOS
Earnings Per Share	5.03	3.76	-25.25
PE Ratio	20.24	30.61	51.24
Earnings Yield	4.94	3.37	-31.78
Book Value	22.77	21.93	-3.69
P/Book Value	4.47	5.24	17.23
ROE (%)	22.09	17.14	-22.48
Profit Margin	12.95	9.06	-30.34
Year End	Dec	Dec

Source: NSE, Company Report & Investdata Research

Strength and Pitfalls

The strength of the company in this troubled business environment is the nature of its products. As a leader in its industry with a multiple product line with different target markets has given its edge to dominate and penetrate into new markets.This would help the company overcome its challenge and sustain operation for growth in the future if recovery from this economic situation becomes a reality. Itscurrent ratio of less than one is an indication that the company may find it difficult meeting up with short-term financial obligations which is not healthy, especially with declining retained earnings, which has resulted in nearly all its earnings being paid out as dividend. 

As we have observed and also as a manufacturing company, more than half of its current assets are stored in the inventory, while the Debt/Equity ratio reveals that the company is operating on borrowed fund. This calls for more retained earnings,a situation that is seemingly being violated by the board of directors which is paying out almost 100% of its earnings to reward shareholders, a situation that is not good for future expansion, especially in this prevailing situation. 

Management should rethink this decision going forward, knowing that continuity is very important, no matter the amount of money the core investors want to repatriate back home.

Technical View

This is a tradable stock that had up and down trend to allow traders buy low and sell high. The stock has formed a falling channel that is trending within the channel to create entry and exit points as it recently retraced from a strong support level of N112 as market and analyst interpret financials released to the market recently.The year’s dividend cut did not affect price, rather it rallied on offshore investors buying to position to partake in the final dividend. Traders and investors should watch trend as reversal is imminent on profit booking.   

Analyst Opinion

Using Price to Earnings Ratio (PER) method, and based on the company's full-year earnings per share of 375 kobo, its price to earnings ratio of 30.61x and despite the state of the economy, is still high as we arrived at the fair value of N80 per share. This means the stock is currently selling at a premium. 

Short-term players should keep their gaze on this stock, while income investors should think long-term when considering the equity. The growing operational cash earnings indicate possibility of upward reversal in the dwindling earnings of the company in the future, considering the nature of its products and increasing market share.

For now we recommend SELL to Traders and investors

NIGERIA BREWERIES PLC
Share Holding Structure
Heineken Brouwerijen B.V	54.09%
Stanbic Nominees Nig. Ltd	15.53%
Other Nigerians & Associations	30.38%
Other Statistics
Shares Outstanding (MN)	7,929,100,888
Opening Price (2016)	N136.00
Closing Price  2016	N147.99
Date Listed	Sept. 5th 1973
Year End	Dec 31st

Management

The company’s management team has demonstrated competence and commitment to driving its vision of delivering value to its customers and creating wealth for shareholders by consistently building capacity to support its profitability level by increasing product lines to meet different market segments. This was hampered by the declining position of the economy with the dwindling purchasing power of Nigerians.

At the same time, the company needs to put more effort into managing its costs, regardless of the high cost associated with manufacturing, marketing and distribution of its products which has reflected on its earnings power.

As a leading brewery in Nigeria today, the company's investment decision to continually build capacity to meet market demand has not really impacted its bottom-line as revealed by the quarterly and full-year earnings report of 2016. Its research and development department need to do more work to reformulate and repackage some of it products or introduced new products.

Five-Year Performance

Looking at the five-year performance of the company, it had made a mixed progress in improving on it sales revenue but the profit level for same period is down as the share price performance also was looking south to reveal the level of confidence of the investing public on the company, since it had rewarded it shareholders with dividend for same period. The company’s product line and marketing drive did not impact much on its sales level as a result of the current economic situation. The continued repositioning, repackaging and the nature of its products are expected to propel its performance higher in the future, as it increases market share with acquisition of companies and new factories to meet demand.  Its sales growth of 24.17% in the period under view is an indication of where the company is going with its investment in expansion and introduction of new products. 

However, the current earnings level seems saturated and declining  after it had hit an all-high of N43.08 billion in 2013 from N38.05 billion in 2012, before closing the period under review lower  at N28.42 billion. This is a pointer to the state of the economy in the period as discretionary income of many Nigerians continues to decline.The marketability of the company's equity on the exchange is a great potential for its trading which has attracted market players and income investors to this stock.

The company's earning yield for five years have been below 10%, a number that is  not  good, even as the company has prospect to enlarge its market share through sales promotions and advertisement, which may subsequently impact its profit. Its profit margin for the same period was below 15 percent, which is low by all standards, whether internationally or locally, but more needs to be done.  

The company's shareholders’ fund is currently valued at N165.83billion, up from N93.45 billion in 2012, representing a 77.45%growth. This is a reflection of its investment in assets to grow earnings power that would drive other profitability indices.

	NIGERIA BREWERIRS FIVE YEARS FINANCIAL PERFORMANCE
		2012	2013	2014	2015	2016
Date Released		22-Feb-13	13-Feb-14	12-Feb-15	11-Feb-16	20-Feb-16
	000,	000,	000,	000,	000,	000,
Price @ Released Date		166	167	126	101.86	115.00
Sales Revenue		252,674,213	268,613,518	266,372,475	293,906,792	313,743,000
Profit After Tax		38,042,714	43,080,349	42,520,253	38,056,123	28,417,000
Shareholders' Fund		93,447,892	112,359,185	171,964,263	172,321,503	165,829,000
Dividend		3.00	4.50	4.75	4.80	3.58

Source: NSE, Company Report & Investdata Research

Estimated Ratios

EPS for the period reflected the  harsh business environment as its earnings power dropped to N3.75 in 2016 from N5.03 after hitting high of N5.70 in 2013. The scorecard revealed least performance in the last five years. The said EPS is same as 30.61x of the market price at release date and yielded 3.37% of market price.

The Book Value at N21.93 indicates that the stock is selling at a high premium, because it had created value for its stakeholders that supported  its earnings growth and dividend through the observed periods  to re-establish confidence and assurance for further growth. The company profitability ratios for the period have been mixed.

	NIGERIAN BREWERIES  ESTIMATED RATIOS
		2012	2013	2014	2015	2016
Earnings Per Share		5.03	5.70	5.62	5.03	3.75
PE Ratio		33.00	29.14	22.94	20.42	30.61
Earnings Yield		3.03	3.43	4.36	4.94	3.37
Book Value		12.36	14.86	22.74	22.77	21.93
ROE		40.71	38.34	25.00	22.09	7.14
Profit Margin		15.06	16.04	15.96	12.95	9.06
Pay-out Ratio		59.64	79.00	84.51	98.00	99.00
Year End		Dec	Dec	Dec	Dec	Dec

Source: NSE, Company Report & Investdata Research