NB Plc 2019Q1: Insurgency, Importation Cost, Low Purchasing Power

Company: NIGERIAN BREWERIES PLC (NB)
Rating: Hold
Current Market Price at Earnings Release: N64.00
Intrinsic Value: N75.03
Latest Cash Div: N1.83
Equity Analyst: Jeariogbe Tunde Segun

Key Financial Tickers:
• This report assessed the financial statistics of Nigerian Breweries for the first three months of 2019 and compared the same with the corresponding period of 2018 to established growth/decline where appropriate.
• All key financial indices reported show that performance during the quarter stood below that of the corresponding period of 2018.
• In other words, estimated ratios stemmed below that of the corresponding quarter.
• Safe for the Cost of Sales Margin that slightly improved, other observed Profitability Ratios in this report stood below corresponding quarter estimates.
Nigerian BreweriesPlcStrength
• NB is Nigeria’s largest brewing group, controlling over 60% of the country’s beer market.
• The Group has a well-diversified product portfolio comprising 26 brands.
• Beyond this is a wide geographical footprint (with nine breweries and two malting plants across the country).
• There is also its large distribution network and extensive customer base, run by an experienced management team.
• A further strength is operational and strategic support from its parent company, Heineken N.V. Global, a major global brewing group, with operations in over 70 countries.
• Nigerian Breweries Plc and Cross-Boundary Energy Limited recently signed a Solar Power Purchase Agreement for the installation and operation of a 650 kW solar plant located at its Ibadan Brewery. According to the management, the solar energy plant will become operational this year 2019.
• This landmark project is the first of its kind in Nigeria as it will supply 1GWh annually to the Ibadan Brewery at a significant discount to the current cost of power. It will also reduce the Brewery’s CO2 emissions by over 10,000 tonnes over the lifespan of the plant.
Challenges
• Although the giant brewer seems to be taking giant steps to significantly drive down its power challenges, including costs, following which it is imperative we mention that power instability is one major challenge faced by operators in the manufacturing industries
• High Cost of raw materials import is another tough point currently faced by the company
• This is not forgetting the widespread insurgency in key parts of the country, which has impacted the company’s sales revenue negatively.
• The low purchasing power is another major challenge facing the sale of Nigerian Breweries’ Products, around the country. Please understand that although the government is now positive on minimum wage increment, the plan to be more strategic and aggressive on tax collection will definitely take back the said increments, thereby affecting disposable income and consequently, purchasing power.
• In other words, the chances of Nigerian Breweries building performance indices might be slim at the moment. In our opinion, the same goes for others in this line of business and especially other manufacturers.


Corporate Figures
• At the end of the first three months of 2019, Nigerian Breweries built its revenue by a marginal 3.33% above that of a similar period in 2018. That is, current Revenue is estimated at N91.38 billion, as against N88.44 billion.
• A total of N8.11 billion was reported through the period as expenses on Excise Duty, up from the N5.47 billion expended in the similar quarter of 2018.
• Thus, Cost of Sales stood at N48.22 billion, as against N44.94 billion reported for the same item in the corresponding period of 2018.
• Gross Profit for the period, therefore, stood at N35.05 billion, compared to the N38.01 billion achieved in 2018 first quarter business activities.
• Having considered all operating expenses, Operating Profit stood at N14.05 billion, which is 20.42% lower than the N17.66 billion reported in 2018.
• Finance Cost was constrained through the period, as it only inched north by 2.83% to N21.15 billion compared to the previously reported N20.57 billion.
• Profit before Tax is estimated at N11.45 billion, which is exactly 24.86% below the N15.24 billion earned in 2018.
• In the same trend, Profit reported for the first three months of 2019 stood at N8.02 billion, below the N10.20 billion posted in its 2018 first-quarter report.


• Retained Earnings also dipped by 12.43% at the current value of N96.24 billion as against the N109.89 billion reported in 2018.
• Non-Current Assets inched marginally north by 2.34% at N300.88 billion, compared to N293.99 posted in 2018.
• Meanwhile, Current Assets inched south 14.89% up to N87.20 billion, compared to N102.45 billion last year.
• Boosted by various commercial papers during the quarter, the Non-Current Liabilities appreciated by 65.57% to N83.45 billion, up from N51.33 billion.
• Current Liabilities, on the other hand, dropped by 17.09% to N129.70 billion, compared to the N156.44 billion reported in 2018first quarter performance.
• On the strength of the above, Net Assets value fell by 7.29% at the reported N174.92 billion.

Liquidity/Risk Ratios
• Total Debt is currently estimated 1.22x the size of its equity, that is, Debt-Equity Ratio is currently 1.22x, this is far above the 0.70x industry average.
• At below unity Current Ratio, the firm could find it somehow tight to service its Current liabilities as and when due. The industry average is just one, signifying that such situation is common among its peers.
• Standing above unity, the estimated beta value of 1.09x confirms favorable investor patronage of the shares of Nigerian Breweries Plc.
• At 14.31x Interest Coverage, we can safely conclude that Nigerian Breweries Plc will easily service its interest yielding liabilities as and when due. This is a further confirmation of the safety of its various commercial papers.


Profitability Ratios
• Cost of Sales margin is currently estimated at 52.77%, which is 3.83% above the 50.82% estimated at the end of the corresponding quarter of 2018.
• Profit before Tax margin is 27.28% below the Q1-2017 estimate. The ratio is now estimated at 12.54% as against 17.24% last year.
• Profit Margin estimated for the year is 8.78%, same as 23.88% below the 11.54% margin achieved in 2018 first quarter.
• Return on Average equity is currently estimated at 4.59% below the 5.41% achieved in 2018.
• The return achieved on Average Assets is now 2.07% as against 2.57%.


Efficiency Ratios
• Testing the management’s efficiency, the Asset Turnover was gauged. The Ratio improved marginally by 5.56% from 22.31% to 23.55%.
• Also tested was the Equity Turnover, which currently stands at 52.25%, as against the 46.88% estimated in 2018.
• In other words, the equity was multiplied 2.22x through the quarter under review, this is 5.59% above the 2.10 times multiples achieved in 2018.
• It was also estimated that Fixed Assets turnover is the same as 23.55% above the 22.31% estimated in 2018.


Investment Ratios
• In a similar pattern to the company’s earnings reported above (since shares outstanding remains same), the estimated Earnings Per Share (EPS) is N1.00, same as 21.35% below the N1.28 estimated in 2018 first quarter
• The said earnings yielded 1.57% of the equity’s share price on the floor of the exchange as at the date the result was released to the investing public.
• Price Earnings Ratio remained on the high side at 15.94x, as against the previous 25.41x, which can equally mean high investor sentiments for the shares of Nigerian Breweries.
• Showing an overpriced position, the Price to Book value ratio is 2.93x, compared to the previously estimated 5.50x
• Further confirming this position is the estimated Book Value of N21.87.
• Operating Expenses Margin to Turnover is 23.15% this is 0.48% below the 23.26% estimated in 2018.


Valuation
• While trying to value the share price of Nigerian Breweries, we put into consideration the unstable growth rate of the dividend, the poor performance which will surely reduce the expected future returns from the firm. Thus, we explored the Dividend Discount Model Valuation model using 2-stage H-Model.
• We have valued each unit of Nigerian Breweries shares at N75.03

https://investdata.com.ng/2019/04/nb-plc-2019q1-insurgency-importation-cost-low-purchasing-power/