International Breweries Plc released its 2015 FY results showing a profit after tax of N1.9billion.
Highlights
- Revenue up 11.65% to N20.4billion
- Operating profit down 11% to N4.4billion
- Pre-tax profits down 28% to N2.8 billion
- Profit after tax down 7.5% to N1.9billion
- Earnings per share down 7.5% to 59 kobo per share
- Proposed dividends of 25 kobo per share
The result above should be a source of concern to shareholders who have held on to the shares at the current average price of N20. For a stock that is priced at a multiple of 33.8x, it appears the time for a massive price correction is near.
Justifying the valuation
Like we have always opined, a multiple of 20x and above (nonetheless 33x) should be justified by a number of factors. These include, revenue growth, operating profit growth, growth in free cash flow, increase in earnings per share etc.
Currently, the company only meets one of the above criteria. Revenue grew 11.65% this period compared to prior year and nearly doubled the 6% growth it recorded year on year in 2014. These are good signs and suggest their efforts towards increasing market share in the value brand segment is right on track.
However, the problem is it needs to grow at a much faster rate. Why is that? Margins!!
Cost of sales went up 21% year on year suggesting a spike in material cost. Its contemporary in the value brad segment, Champion Breweries also experienced a 20% spike in cost of sales.
Operating expenses went up by 18% and suggest increase in marketing and distribution cost which is a short term sacrifice required to help them continue to sustain topline revenue growth.
Finance cost is also up by 67% to N1.8billion piling more pressures on margins. But then, one can argue that they needed debts to ensure cash is available to invest in capacity building.
Looking at the above, it is clear that revenue growth does need to do better to justify cater for the rising cost as well as justify such a premium on its share price. The current growth rate of 11.6% is not just good enough to sustain a share price of N20 per share (stock is down 14% year to date).
Weak and unnecessary dividend?
The company threw in a sweetener by paying dividend per share of 25 kobo (-22% YoY). The dividend will reduce the company’s cash by an estimated N815 million, cash they could have used in defraying part of the N9.7 billion debt. Choosing to pay a dividend that suggest a yield of under 2% smacks of a desperate need to keep the share price at current levels (its year low is N17).
Valuation
If that is the plan, then rational investors (who are scarce we must add) should start to re assess their valuation of the stock. A simple dividend valuation model already shows the stock is highly overvalued. Using a multiple of 10x on its operating profit suggest a price per share of about N13.6. Using a peer group average multiple of 25x on EPS also suggest a value of N14.7 per share.
Liquidity protection
International Breweries closed trading Friday flat at N20 with just 35,000 units exchanging hands. Its lack of liquidity may well be the strongest force that determines how high or low its share price can go. As such, it will be hard for fundamentals to determine its true value.