Nigerian Breweries succeeded in defending profit margin in the first quarter but profit growth needs to step up for even moderate growth in the first quarter to be maintained to full year. The brewing giant was able to raise profit to a new peak last year after a flat growth in the preceding year. The current year however looks like another year of flat profit growth for the company at current rate. The company managed to keep costs in check in the first quarter but likely rise in finance charges could hurt profit performance in the coming quarters.
The company earned N10.06 billion in after tax profit at the end of the first quarter, which is an increase of 6.8% over the corresponding quarter in the preceding year. Based on the current growth rate, after tax profit is projected at N42.6 billion for Nigerian Breweries in 2014. That will be a marginal decline of 1.1% from the peak profit figure of N43.08 billion posted in 2013.
The company had improved net profit by 13.2% in 2013 against a slight decline of 0.8% in the preceding year. Profit therefore needs to step up in subsequent quarters for the company to be able to record another profit improvement in the current year. Whether the company will be able to step up profit growth against rising debts with anticipated rise in interest cost are the critical developments to watch on Nigerian Breweries in the current financial year.
Profit is growing at par with sales revenue in the current year and profit margin is maintained year-on-year. Compared with the full year position however, net profit margin has declined from 16% in 2013 to 14.6% in the first quarter of the current year. It is also lower than the 15% record in the 2012 full year. Sales revenue will need to accelerate or profit margin improve for the company to do better than a flat growth in profit in the current year.
Despite the decline in profit margin, Nigerian Breweries remains ahead of competitors on profit margin. Guinness Nigeria is significantly down on profit margin from 11.7% in the 2013 full year in June to 7.6% at the end of the third quarter last March. International Breweries is also below Nigerian Breweries on profit margin at 14.1% at the end of its third quarter last December.
Sales revenue amounted to N68.98 billion for Nigerian Breweries in the first quarter. This is an increase of 6.8% over the corresponding revenue figure in 2013. If the current growth rate is maintained to full year, the company is expected to close the year with a turnover of N274 billion. This will be a marginal improvement of 2.0% over the sales revenue figure of N268.61 billion the company posted in 2013.
Revenue growth has been slowing down for the company in recent years and this is expected to continue in the current year. Turnover slowed down from 11.7% in 2012 to 6.3% in 2013 and the growth rate is expected to slow down further to a marginal improvement this year based on the first quarter growth rate.
The same pattern is applicable to Guinness Nigeria, which has continued to record decelerating sales revenue from 22.7% in 2011 to 13.1% in 2012 and further to 2.1% in 2013. A drop in sales revenue is projected for Guinness Nigeria in the current financial year ending June.
The strength to achieve the level of profit margin seen in the first quarter came from a drop of 43% in interest expenses at N907 million. Falling interest cost also made a positive impact on the company’s bottom line in 2013. It dropped by 21.6% to N7.48 billion in the year but the ability to keep interest expenses down in subsequent interims is in question.
Declining interest expenses is not explained by the company’s balance sheet debts figures. Over the first three months of the year, the closing figure of long-term debts for last year multiplied four times to N36 billion. Short-term debts are only slightly reduced at N6.13 billion over the same period. The major build-up of balance sheet debts can be expected to result in rapid increase in interest expenses in subsequent interims with adverse implications for profit margin and profit growth for the company this year.
Another favourable cost behaviour that helped profit performance in the first quarter came from distribution/administrative expenses, which closed flat during the period. The cost saving on this expense line enabled the company to moderate the impact of the increase of 10.6% in cost of sales on the bottom line. Cost of sales claimed an increased proportion of sales revenue in the first quarter at 53% compared with 51.2% in the corresponding quarter in 2013. This is above the 49.2% of turnover devoted to cost of sales at the end of 2013.
Major developments in the company’s balance sheet in the first quarter include a rise of 85.4% in trade debtors and other receivables at N28.02 billion over the closing figure for last year. There was also a decline of 5.0% in inventories and an advance of 216.4% in cash and bank balances to N30.15 billion. Trade and other payables went down by 13.2% to N60.59 billion during the same period.
The changes in the balance sheet resulted in cash flow difficulties for the company in the first quarter. Net cash generated from operating activities fell by 98% to just N391 million. The company had to resort to heavy borrowing to meet cash requirements for investing and financing activities.
The company earned N1.33 per share at the end of the first quarter, improving from N1.25 per share in the first quarter of last year. Based on the projected net profit for the year, earnings per share is expected to come to N5.53 for Nigerian Breweries in 2014. This compares with the peak earnings per share of N5.70 the company posted in the 2013 full year.
The company raised dividend per share from N3.0 in 2012 to N4.50 per share in 2013. Pay-out ratio increased from 59.6% to about 79% over the period. The company’s register closed on 6th March while payment will be made on 15th May 2014.
