Champion Breweries Plc released its 2017 Annual report revealing a profit after tax of N517.5 million compared to the N530.3 million reported in the same period in 2016. The company’s revenues were up 23.6% from N3.8 billion in 2016 to N4.7 billion in 2017.
This is the third straight year that the Champion Breweries has posted a profit since it reported back to back losses between 2013 and 2014. The company posted a combined back to back losses of a combined N1.9 billion for those years. The latest result thus gives an impression that the company is on a sustainable streak of profitability except that, it may just not be enough.
This is because if this streak continues, then-Minority shareholders who own about 17% of the shares of the company (using the amount currently on a free float) will have to wait a lot longer to get any significant return on their investment. Champion Breweries will need to grow a lot faster, not just in terms of revenues but profitability if it is to score any major win for its shareholders. At the current pace, it cannot win.
Look to the accumulated losses carried by the company and you will understand why it has no immediate chances of scoring any significant winners in the near future if it is to rely solely on its fundamentals. The company is carrying an accumulated loss of about N8.5 billion which on the back of its recent profitability could take another 17 years before it is wiped out.
A cursory review of the company’s result indicates it does not have the business model required to grow its profits exponentially or beyond the current levels. Champion Breweries makes money by brewing and marketing of Champion Lager Beer and Champ Malta. The Company also provides contract brewing and packaging services to Nigerian Breweries Plc, a related party within the Heineken group. Raysun its majority shareholder is owned by the Heineken Group, who in turn own majority shares in Nigerian Breweries.
Its N4.7 billion revenue include a N1.7 billion income earned from brewing and packaging services it rendered to its parent company, Nigerian Breweries. The balance N3 billion it earned from the sale of its beer and malta drink. These two revenue lines have no immediate ability to grow the company’s profits exponentially beyond the N500 million it has averaged in the last two years. Our expectation is that a company like this should be reporting profits in billions but it can’t because it is a small brewery with limited scale.
So what are the options for scoring an immediate win for shareholders? Shareholders of Champion Breweries who according to the company get a return on capital of just 6%, can win through share price appreciation or a scheme of capital reduction. On the latter, the board can seek approval for the shareholders to set-off the accumulated losses of N8.5 billion against the share premium of N9.3 billion. This was not possible in prior years but now is following its latest results.
If it sets off losses against share premium, then it could be in a position to pay dividends, justifying its existence as a going concern determined to reward shareholders with regular returns. It also helps considering that its business model keeps it at a revenue range of N4 – N6 billion and a profit level of N600 million assuming a profit margin of 10%. Its return on average equity (excluding other serves) could also leap two folds to 11%.
The second option, share price appreciation, could occur through a combination of a possibility of future dividend payment (if it strikes out the accumulated losses) or gets its parent company to buy out minority shareholders or the second largest shareholder, (the Akwa Ibom State Government) or both.
Rumours that this was in the offing helped spike their share price three years ago to over N15 before plummeting to an average of N2.5 today. However, recent moves by the company to comply with the free float requirement of the Nigerian Stock Exchange suggest there are no immediate plans to take this option.
For retail investors, who make up a huge chunk of the minority shareholders, they can only hope that the management does what is logical, by setting-off the share premium against the accumulated losses. For now, that is the only method of winning.
