Looks like the merger between International Breweries, Intafact Beverages Limited and Pabod Breweries Limited seem not to be going quite well.
In the latest 9 Months results released by the company, revenue rose 11.6% to N36.5 billion compared to the N32.7 billion reported in the full year ended March 2017. Profit after tax was up by more than 40% to N1.42 billion compared to its full year ended March 2017.
Unfortunately, the company’s earnings per share, which is they key indices to watch, fell by about 45% to 17 kobo. The reason for this fall has resulted in a suggested HOLD recommendation by Stanbic.
Stanbic pointed to margin contractions recorded by the company in its latest results and noted that the increase in operating cost may have been due to the restructuring following the merger.
Stanbic – Gross margin contracted to 38% from 46% for the 12-month period ended 31 March 2017, largely due to the sharp increase in the cost of raw materials, overheads, and depreciation. Similarly, EBIT margin contracted 16ppt to 9% with pocket of cost hikes. There were markedly sharp increases in salaries (33%), bad and doubtful debt (30x) and business running costs (129%) among others. This performance comes as a negative surprise because proforma statements had suggested similar operating profiles for the three breweries and EBIT margins for the pre-merger entity as at half year was 20%. It is likely that there are non-recurring costs from the merger or possible restructuring costs, which we will raise with management.
They also noted that the company’s balance sheet was highly geared having increased to 189% from 86%. International Breweries saw its debt rise from N11.9 billion to about N88 billion between March 2017 and December 2018. This means a higher finance cost for the company further eating into profit margins.
Stanbic – A highly geared balance sheet is a concern: Debt to equity ratio notably increased sharply to 189% from 86%. Of particular concern is that most loans are short-term, including a N19bn overdraft with interest rates at 19% to 23%. We had expected a marked increase in debt given the investment in the $250m brewery but gross debt balance of N80bn is 2x our estimate. The $25m syndicated loan facility which was scheduled to mature February 2018 remained on the balance sheet. Consequent to the sharp increase in debt, net finance costs increased 24% driven by a fivefold increase in interest charges on bank loans even as FX losses declined 47%
Other potential negative headwinds cited were the anticipated increase in excise duties which will come into effect by July. Stanbic had no choice but to place this stock as a HOLD. They also valued the company at N64.