NB: Full Year Earnings Fall Below Market Expectation, Despite 21% Dividend Growth

The management of Nigerian Breweries, the Nigerian Stock Exchange’s biggest company by market capitalization behind Dangote Cement, on Thursday released earnings report for the its full-year ended December 31, 2017 earlier than the released date for the 2016 numbers, making it the first early  filler for December  2017  year-end accounts.

Its performance in the period under review stagnated, as earnings trend was in line with the last quarter of the financial year as a result of seasonality impact of the festivities associated with the yuletide, which boosted sales irrespective of the high cost of sale at 58.34%. Finance cost fell, just as foreign exchange losses, due to the relatively stable exchange rate, thanks to the sustained intervention in the currency market by the Central Bank of Nigeria (CBN). This resulted in turnaround for operators in the nation’s manufacturing sector, unlike the situation in the preceding year. The company’s sales revenue and earnings growth reflected little improvements in the disposable income of Nigerians as economic activities continued looking up to propel the nation’s exit from recession during same period.

However, the increasingly stiff competition and saturation in its industry may threaten sustainability of this little improvement in the quarterly numbers and full year of this current 2018 and beyond.

Specifically, the 2017 numbers revealed a marginal rise in turnover to N344.56bn, representing an increase of 9.82%, compared to N313.74bn in 2016, while profit level for the period was slightly better at 16.17% to N33.05bn from N28.42bn in the preceding year.

Shareholders’ funds inched up marginally by 7% from N166.83bn in 2016 to N178.3bn, just as Earnings Per Share for the period increased to N4.13 as against the N3.58 in the comparative period of 2016,.

Consequently, investors’ waiting period decreased slightly to 31.80x from 33.43x as a result of little improvement in earnings, despite the increase in price, translating to 3.95% of the market price as at released date, which is above the 2.99% yield estimated in 2016.

The high cost of sales was diluted by the decline in financing cost and increase in other incomes, against the backdrop of relatively stable exchange rates which has marginally reduced production cost, thereby boosting profit line for the period.

The company’s mild performance was attributed to the fact that this financial year saw Nigeria’s economy recovering from recession, which reflected positively on macro-economic indices, like the continued decline in inflation rate throughout the period to disposable income among enhance consumers and consequently boost demand as shown on the marginal increase in sales.

Strengths and Pitfalls

The ongoing economic recovery in Nigeria as well as the fundamentals and nature of NB’s products remain its strength, further enhanced by the recent acquisition and addition of a new array of products to its bouquet ensures that it is has something to offer everyone, especially at a time consumer confidence and spending ability are looking up. This industry leadership and multiple product lines with different target markets has given NB an edge and the confidence to penetrate new markets, a factor that would help it overcome challenges and sustain operation for future growth.

The nation’s economic recovery must however be supported to enter into the growth phase, leading to a plethora of high economic activities that will further enhance purchasing power among the people.

Its Current Ratio (current Assets/current liabilities) of less than one (0.56), is an indication that the company may experience difficulty meeting short-term financial obligations, a situation that is unhealthy, especially given the dividend pay-out ratio of 100%, which means there is no retained earnings to support expansion. No wonder NB’s debt profile is reflecting interest coverage of 5.33, given that all of its earnings are distributed as dividend, resulting in dividend coverage for the period of 1.16.

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 funds. This calls for more retained earnings by the foremost brewer, rather than the current practise of using almost all its entire earnings to reward shareholders, particularly in a highly competitive sector renown for price war.

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

NB is a tradable stock that has sustained an up and down trend to enable traders buy low and sell high. The stock has formed a rising channel that is trending within the channel to create entry and exit points as it recently pulled back from a resistance level of N193.00 per share on August 18, 2017 to a strong support level of N125 as the market and analyst continue to interpret its latest financials released recently. The year’s dividend growth is yet to affect price, due to the seeming correction wave in the market. However, traders and investors should watch trend as reversal is imminent.

Analyst Opinion

Using Price to Earnings Ratio (PER) method, and based on the company’s full-year Earnings Per Share of 413 kobo, its price to earnings ratio of 31.80x is high despite the recovery in the economy.

That noted, Investdata arrived at a fair value of N60 per share, which means the stock is currently overpriced and selling at a high premium.

Short-term players should keep their gaze on this stock, while growth investors should look away from it. The positive operating cashflow indicates the possibility of stronger earnings in future, considering the nature of its products and increasing market share.

We recommend hold to investors, while traders take advantage of its pullback to position.

Management

NB’s management has demonstrated commitment to creating value for its customers and shareholders by consistently building capacity to support its profit level through increased product lines to meet different market segments and cut cost so as to benefit from economic recovery and gradual improvement in purchasing power of Nigerians.

The profit margin of 9.39% is very poor meaning, as it translates to the fact that for every N1 received as sales revenue, only just 9 kobo is converted to profit and Return on Asset is just 9%.

Five–Year Performance

Taking a critical look at the company, its five-year performance shows mixed progress with very unstable sales revenue, bottom line and share price performance to reveal the level of confidence of the investing public on the company.

The company’s robust bouquet of products and aggressive marketing drive have not impacted much on sales level as a result of the stiff competition. The continued repositioning, repackaging and the nature of NB’s products are expected to propel its performance higher in the future. Turnover growth of 28.28% 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 but looked up from 2016 figure of N28.42bn to N33.05bn which is below its five-year high of N43.08bn attained in 2013. The liquidity of the company’s equity on the exchange is a great potential for trading and remains a factor that has attracted market players and income investors to this stock.

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

The company’s net assets currently valued at N178.3bn, up from N112.36bn in 2013, representing a 58.69% growth. This is a reflection of its investment in assets to grow earnings power that would drive other profitability ratios.

Estimated Ratios

The company earnings power for the period is a reflection of the unstable business environment as Earnings Per Share oscillates to N4.13 in 2017 from N5.70 in 2013. The scorecard revealed least performance in the last five years. The said EPS is same as 31.80x of the market price at release date and yielded 3.95% of market price.

The Book Value at N22.30 indicates that the stock is grossly overpriced, 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.

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