Three Troubling Signals From Nigeria Breweries Latest Results

As expected Nigeria Breweries released its 2015 9 Months results showing nine months pre-tax profits dropped 12% to N37.5 billion. Third quarter profits (three months to September) also dropped year on year by 25% to N6.5 billion making this quarter one of the worst in the last three years.

Time to panic?

Operating Expenses – Despite posting an impressive quarterly year on year revenue growth of 19% to N63 billion the company was unable to curb rising operating expenses. The company reported a year on year operating expense growth of 48% to N22.1 billion for the third quarter of 2015. The was an astronomical N7 billion increase from a year earlier. The earnings release did not contain notes explaining the reason for the hike.

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Finance Charges – The second sign was a hike in finance charges which spiked 40% year on year during the quarter to N2.2billion. The additional N6 billion in finance charges compared to the year before is the direct result of the outstanding debts of about N44 billion it carried between December 2014 and June 2015.  The company however reduced the debt to about N28 billion by the end of the third quarter. It repaid the debt from the N35 billion in operating cash flow it had generated this year.

Rising Payables – Another frequent source of finance for Nigeria Breweries is its trade payables which now stands at a whopping N108 billion. Trade payable increased by N29.8 billion this quarter. Nigeria Breweries now has a negative working capital of N87.5 billion. Shareholders should be worried about the state of its liquidity as it will have to raise equity from the markets anytime soon if it is to find money to finance its negative working capital of N60 billion (if you discount short term debts of N27 billion).

Based on this we still expect the company to borrow again if it is to fund the interim dividend of N1.2 per share it also declared which should cost it another N6 to N7billion in cash. Raising money could mean either of two things for shareholders. A ratcheting up of share price by speculators who are hoping the company will want to jack up valuation or a price dip as sentiments continue to remain gloomy for the beleaguered sector.