Nigerian Breweries Plc released its 2013 FY Audited results showing a 6.3% rise in revenue to N268.6billion (2012 FY: N252.6billion) during the year. Adjusted Operating profit also rose 7.2% to N67billion compred to N62.6billion posted a year earlier. The brewery giant closed the year with a 13.2% growth in PAT to N43billion at the end of the financial year. This on paper is a fantastic result right? Lets analyse;
Key Highlights and observation[upme_private]
When you are presented with an impressive result such as this, it is always good to search for the negatives as much as we take delight in enjoying the positives. But first the positives;
Revenue growth of 6% is an impressive feat considering the operational size of NBL as well as the intensity in competition during the year.
Following their 9 months results one might easily conclude matching 2012 revenue let alone beating it may have been a tall order. However, the company’s 2012 revenue was topped by 6% on the back of strong Q4 sales which basically dusted Q1-Q3 results preceding it.
NB Plc posted a strong Q4 PAT of N16b and more than doubling Q3’s N6billion. This trend was noticed in 2012 as well when they closed the last quarter of the year stronger at N12.8billion also more than doubling the preceding quarters result of N5billion.
This is not a coincidence as you would expect the last quarter of the year to be the biggest for them. The Xmas season in Nigeria will always rank high in terms of revenue for NB. Revenue was N78.3 in Q4 2013 compared to N56.4b (Q3 2013). 2012 shared a similar statistics with N72billion and N56billion.
The higher revenue ensured margins improved across board down to bottom line even though lower interest rates did play a role (we will come to that later). Gross profit margin was 51% and operating profit margin was 25% compared to 50% and 24.8% in 2012 respectively.
NBL also reduced its loan portfolio by a massive 82% from N50.6billion to just N9billion. This helped reduce debt to equity ratio to just 30% giving the company ample room to raise more funds if it needs to.
The impact of this was also seen in 23% drop in interest expense from N8.9billion to N6.9billion during the year. This helped cushion the impact of rising additional YoY operating expenses of N7b. Interest on their loans rank between 10% and 11% which is all standards belong to “risk free” class.
And in case you are wondering, they did capitalize some interest as you would agree some of the loans were used to fund capex. The company reveals a sum of N610million was capitalized.
NB return on equity was 31% and return on asset 25.6%. A 31% return on equity is about twice MPR rate of 12% and almost 4x Inflation rate. The underlying business is performing well indeed (it’s a different case for new investors). Return on Asset of 25.6% further makes the interest rate of 11% seem very affordable. A rule of thumb believes a company has stronger borrowing capabilities when its interest rates are below ROA.
Now to the bad;
Flipside of note
Nigerian Breweries has serious liquidity problems which must concern management and any potential investor for that matter.
A negative working capital of N55billion (2012:N30billion) may not seem like an immediate risk to the company considering its strong balance sheet and sound fundamentals but it is a risk all the same.
The company has about N69.8billion in trade and other payables with contractual maturities of under 6 months. So here is the problem I see
NB generated about N91billion (2012: N85billion)in operating cash flows before changes in working capital in 2013. Assuming it does same in 2014, it will need to pay off the N69billion, pay for dividend of about N34billion, service debts and off course finance its operations.
This suggest liquidity pressures will persist and its either the company dips its hand into the short-term debt or continue to owe its suppliers (of which related parties are in the plenty and tax liabilities is mounting).
This my friends is why a company with over N100billion in retained earnings will continue to pay dividends not befitting of its earnings capacity. The cash is simply not there pay yields above 5%.
So whilst, working capital may not be an immediate problem (or even remote) shareholder returns via dividends will continue to remain paltry until earnings improve significantly. And going by their recent press release “the operating environment is expected to remain challenging.” there is little assurance cash flow will improve.
Where does that live a shareholder/Investor?
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P.E 27x, Peg ratio about 3.5x, PB 10x are indices intending value buyers loathe.
You see, ROE of 31% is why when you invest in shares you should look for quality companies and go long-term. For long time shareholders this result is just simply awesome and those scary indices above will just be in your favour regardless.
NB share price has been flat in the last one year with a negative 1 year return of -6%. It did reach a high of N179 in August but that was probably a one of. Dividend yield is just 3%…nothing different from keeping your money in a savings account.
It’s a bit of a quandary right? Impressive results, good fundamentals but poor shareholder returns.
I guess the solution probably would be to undergo some form of capital reconstruction similar to what Cadbury did. But it’s a backdoor move and not one to impress the market. Besides the circumstances differ and cash isn’t even available to refund shareholders for cancelled shares. Alternative is to allow the market do it itself by adjusting the price about where it should be under N100.
Is that possible? Don’t ask me oh, ask the market!