Gulder, Star, Heineken, Maltina, Fayrouz! Nigerian Breweries Plc is visibly the most recognised beer brand in Nigeria. Their collection of beverages ensures their dominance in the highly competitive beer market remains assured. Last year (2012) the Nigerian brewing industry had an estimated value (revenue) of about N400billion. NBL has a whopping 63% of that share posting a revenue of N252billion at the end of its financial year ended December 2012. Only 15% of this amount (N38billion) will remain at the end of the year as profit after tax.
But that is not surprising considering the current economic climate and stiff competition facing the beer industry. Cost of Sale and operating expenses will continue to thread higher as they face off with the dual demon on soaring cost of raw materials and waning consumer demand. That is why the company that is able to keep its gross profit margin at about 50% annually if its model is to remain sustainable. Selling, General and Admin Expenses also need to be about 55% of resultant gross profit to stand any chance of increasing bottom line. NBL did just that, posting Gross Profit margins of 50% this year (2011:52%) with S,G&A slicing off 51% of Gross Profit. But you don’t expect them to remain within this comfort zone in the coming years as I see margins shrinking further.
The merger of Sona and Life Breweries helped the company avoid having to build new refineries staving off the pain and risk associated with such projects. If that was the benefit, the cost is off course having to pay N62billion for two subsidiaries with a net asset of N15.2billion. The not so hidden risk here is that IFRS requires that the resultant goodwill must be tested each year a prelude for future write offs. Another benefit may well be the need to remain solvent in times of stiff competition. Oh yes, NBL does trade on a huge negative working capital of N31billion (2011: N33billion) making bank lending an obvious route for liquidity.
A N60billion 5 year annual revolving loan will provide a lifeline and I bet this will remain the same for the next three years. N45billion of this has been withdrawn and the impact already felt on bottom line. The company paid N8.3billion in net finance cost or 13% of operating profit which by most standards is innocuous. After all, despite having a net finance income in the prior year they still posted a pre-tax profit of N55billion for 2012 just N2billion shy of 2011 figure. Returns on Equity still came up double figures at 24%. Return on Assets as well was even better at 25% further providing cover for the already lowly interest rate of 12%.
In fact, things may have been better where it not for taxation. The beer industry have been under intense pressure by the government lately making them suffer all forms of multiple taxation and duties. This year they paid 31% of Pre-tax profits (N17billion) in taxes second only to Zenith Bank in the entire NSE (by my estimates). 2011 was N18billion and
For all the strengths and weaknesses inherent in the company’s business nothing in their suggest the current share price of N177.9 is defendable. It’s dividend yield is just 1.7% and worst still the price is about 31x its Trailing Twelve Months (TTM) EPS. Price to book ratio is whopping 13x and even the price is 5.3x its TTM sales. The 2013 first quarter earnings recently released also offers no comfort as revenue only grew 4% and operating expenses rising 9%.
Competition is rife in the industry and I do not see a double-digit growth in revenue let alone earnings this year. Organic growth in value to shareholders is not foreseeable in the near term in my opinion leaving only share price appreciation as the only value maximization option. That option I believe has been exhausted and I do not see a justification in buying this share at anything more than N100 per share. The market may be bullish but having learnt lessons in the past I will simply remain engulfed within my margin of safety.
