International Breweries' earnings prospects indicate moderate growth

By The Citizen
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International Breweries is on the path of consolidation this year after a big turnaround in the preceding financial year. A continue growth in revenue and profit can be expected from the company in the current financial year but growth will most likely slow down from the exceptional record in the 15-month financial year ended March 2013. A strong growth in revenue and profit has been achieved in the second quarter but full year outlook indicates a moderate improvement over the preceding 15-month figures.

The company grew sales revenue by 39.5% to N8.63 billion in the second quarter ended September 2013. This represents a stable growth in revenue from the N4.34 billion the company posted in the first quarter. Based on the current growth rate, sales revenue is forecast at N18 billion for International Breweries at the end of 2013/14 financial year.

The full year sales revenue outlook indicates a moderate improvement of about 3.0% over the preceding 15-month turnover of N17.4 billion. The company has maintained a rapid growth in sales revenue over the past five years and this year is likely to see the first major slow down in revenue in many years. Last year, sales revenue expanded by 75.6% from N9.91 billion in the preceding year. The strong growth indicates significant gains in market share in the brewing sector.

Profit performance improved in the second quarter and the full year outlook has improved as well. The company closed the second quarter with an after tax profit of N1.09 billion, which is a 20.9% growth over the corresponding figure last year. It is also an accelerated growth from the first quarter net profit figure of N0.53 billion.

Based on the improved growth rate, International Breweries is expected to close the current financial year with a net profit of about N2.5 billion. This will be an improvement of 7.3% from the N2.33 billion net profit the company posted in the preceding year. The last financial year was a major turnaround for the company when its after tax profit advanced from just about N200 million in 2011.

The company is however growing sales revenue this year ahead of profit, which is due to a decline in profit margin. Net profit margin is down from 14.4% in the corresponding quarter last year to 12.6% at the end of September. This is also below the 13.3% net profit margin recorded at the end of the last financial year in March. It is however a slight improvement from 12.2% recorded in the first quarter.

Decline in profit margin seems to be an industry wide development in the breweries sector this year due mainly to rising interest expenses. Nigerian Breweries recorded a decline in net profit margin from 15.1% at the end of last year to 14.1% at the end of the third quarter. Guinness' net profit margin is also down from 8.8% at its full year last June to 7.8% at the end of its first quarter.

For International Breweries, interest cost is the major issue it is contending with this financial year. It rose by 578.4% to N562 million at the end of the second quarter and exclusively accounted for the decline in profit margin during the period. The figure is in no way to be compared with the N18.5 million the company paid as interest expenses in the last 15-month financial year.

A big increase in long-term borrowing happened from only N313 million in the correponding period last year to N4.87 billion this year. However short-term borrowings have dropped by about 48% to N1.01 billion during the same period.

In respect of two other major cost lines, the company saved revenues during the review period. Cost of sales rose at a lower rate of 35.2% than sales revenue. This improved gross profit margin slightly from 47.8% to 49.4% over the review period. It also represents a significant gain in gross profit margin from the 44.3% recorded at the end of the last financial year.

Distribution/administrative expenses grew well below sales revenue at 15.7% compared to 39.5%. Tis helped the company to save revenues though the virtual disappearance of other income affected the bottom line.

The company earned 33 kobo per share at the end of the second quarter, improving from 27 kobo in the corresponding period last year. Full year earnings per share is projected at 76 kobo for International Breweries at the end of the current financial year. This will be a slight improvement from the 71 kobo the company earned in the preceding year.

Shareholders got a cash dividend of 25 kobo per share at the end of the last financial year. An improvement in earnings per share is not anticipated in the current year based on the full year earnings outlook presently. The company may keep dividend per share unchanged at 25 kobo at the end of the current financial year.

Major changes in the balance sheet during the review period include a drop of 84% in cash and bank balances, a drop of 28.3% in trade debtors and other receivables and a drop of 72.8% in trade creditors and other payables. Net cash from operating activities improved significantly from N474 million to N1.52 billion over the period. There was a major drop in cash utilisation for investing activities but new pressures from financing activities led to a net decrease in cash flow during the review period.