When May & Baker decided in 2006 to deviate from its norm (pharmaceuticals) and venture into food processing, it seemed like the perfect move. At the time, the fast moving consumer goods (FMCG) market was full of opportunities and every player wanted in on it. Companies already in the FMCG expanded their product lines to accommodate more products while others like May & Baker, a Pharma company explored this as a new vertical.
Tiger Brands, a South African consumer giant had just taken over Dangote Flour as it seeks opportunities in Africa’s largest market. Honeywell also expanded its food division, opening up new lines that it hopes will compete.
Apparently, some of these companies had seen the billions raked in annually by Dufil, the makers of the popular Indomie Noodles. Surely, it is a market that could accommodate more players, well, so they thought.
For May & Baker, there was a model they could follow. After all, the likes of GlaxoSmithKline (GSK) was successfully combining its booming beverages lines with an equally successful pharmaceutical production outfit.
But the business clime has changed a lot since then. The fall in oil prices and the ensuing recession that hit Nigeria ravaged the economy in ways not seen since the eighties. Consumers, whom consumer food players had targeted, reduced their consumption expenditures.
Everyone started to feel the pinch. From Cadbury, to Unilever to Nigeria Breweries, they all reported massive declines in revenues and margins. Some had the balance sheet that could survive while also having a clear understanding of how to dig their way out of it. Some didn’t!
GSK, the big pharmaceutical that May & Baker modelled after, decided on a massive restructuring in line with orders from its Europe-based parent company. Its beverages arm, makers of the popular Lucozade and Ribena was sold off to Japanese maker Suntory in 2016.
Dangote Group bought back Dangote Flour for $1 while Honeywell scales back its investments in its food division. In light of the changing business environment, and also considering the fact that May & Baker’s Mimee Noodles was struggling to compete in a saturated market, it became imperative for the company to either do more to manage the brand, or sell it off completely.
We were thus not Surprised when May & Baker decided to sell off its food line to Dufil Nigeria Limited for ₦775m. The 100% acquisition was finalised on April 26th following the fulfilment of all necessary conditions, which include gaining the approval of both companies’ Boards of Directors, their respective shareholders, and the Nigerian Stock Exchange.
Why did it become necessary that the company take this decision? Let us consider that shortly.
Why the divestment?
Without a doubt, the noodles market in Nigeria has immense opportunities. This is considering the fact that lots of Nigerians enjoy eating the easy-to-cook meal. For instance, in 2016 the World Instant Noodles Association ranked Nigeria as the eleventh country in the whole world with the highest consumption rate of instant noodles. Now considering the facts that most Nigerians consume a lot of carbohydrates and also that the country’s population keeps expanding every year, it is safe to say that the demand for noodles can only keep rising. So if this is the case, why did May & Baker sell Mimee Noodles to Dufil?
The simple truth is that the Mimee Noodles brand could not compete. It literarily struggled to survive in a market dominated by the likes of Indomie, Chikki, Cherie, Supreme Noodles, etc. Indomie alone (which is owned by Dufil Nigeria Limited), controls more than 50% market share.
There are also about twenty different instant noodles brands that are readily available across Nigeria today, and the majority of them are struggling with about 50% market share. What this means is that Mimee Noodles had a lot of competition to contend with and it surely had no chances to win.
The competition affected the brand’s ability to generate enough revenue in order to supplement the parent company’s annual profits. This is despite the billions of naira that had been invested into it. While commenting on the reasons behind the recent divestment, May & Baker’s Head of Corporate Communications, Sandra Aduba, noted that the company ran at a loss for years due to poor sales of the product.
In the company’s 2017 financial year report, the food arm contributed ₦1,295,675,000 to a full year revenue of ₦9,352,636,000. This is less than the ₦2,111,738,000 that was realised in 2016. Prior to that, the company generated ₦2,032,042,000 from the subsidiary in 2015, and ₦1,951,444,000 in 2014.
But why was the food arm sold at such cheap price?
May & Baker plans to raise capital through the divestment to help with the actualisation of its refocused business model. In other words, the company is in need of funds, which explains why it readily sold the subsidiary to Dufil at ₦520 million less than the amount the subsidiary generated last year. As a matter of fact, the company is so cash-strapped that it is also planning to raise capital through the stock market later this year.
In conclusion, it is interesting to see how May & Baker’s Mimee Noodles finally came to an end. However, in spite of the circumstances, this is a better ending compared to the unprofitability that has characterised its existence over the years. Hopefully, now, May & Baker will focus on the production of pharmaceuticals, something that it has successfully done for many decades now.
GlaxoSmithKline in big trouble as losses mount
The results were less than impressive with several key indicators showing a year-on-year decline.
GlaxoSmithKline Consumer Nigeria Plc (“GSK Plc” or “the Company”) is a public limited liability company with 46.4% of the shares of the Company held by Setfirst Limited and Smithkline Beecham Limited (both incorporated in the United Kingdom), and 53.6% held by Nigerian shareholders.
The ultimate parent and controlling party is GlaxoSmithKline Plc, United Kingdom (GSK Plc UK). The parent company controls GSK Plc through Setfirst Limited and SmithKline Beecham Limited.
The Company recently published its unaudited first quarter (Q1) 2021 consolidated financial statements for the period ended 31 March 2021.
The results were less than impressive with several key indicators showing a year-on-year decline. For example, Group revenue (turnover) declined from ₦4.99 billion in Q1 2020 to ₦3.46 billion in Q1 2021 a drop of over 30.66%. The revenue drop was due to a sharp decline in the local sale of its healthcare products.
Total loss after tax as of Q1 2021 was ₦238.07 million compared to a profit after tax of ₦113.47 million for the same period to Q1 2020.
The company is essentially divided into two segments viz: Consumer Healthcare and Pharmaceuticals. While the Healthcare segment was largely profitable in Q1 2021 (making a profit before tax of ₦ 8.73 million by March 31, 2021, the pharmaceuticals segment made a loss of ₦262.93 million in the same period.
The Consumer Healthcare segment of the company consists of oral health products, digestive health products, respiratory health products, pain relievers, over the counter medicines, and nutritional healthcare; while the pharmaceutical segment consists of antibacterial medicines, vaccines, and prescription drugs. While goods for the consumer healthcare segment are produced in the country, the pharmaceuticals are all imported.
The largely imported pharmaceutical products are thus exposed to the vagaries of foreign currency fluctuations coupled with a negligible to no revenue from the foreign sale of its healthcare products (same as in Q1 2020) as it barely exports its products out of the country.
The cost of importing the antibacterial, vaccines and prescription drugs, and the significant local operating expenses wiped off the marginal gross profits made by the pharmaceutical segment of the company. In effect, the gross profit of ₦508.12 million made by the pharmaceutical segment of the company was eliminated by an operating expense of ₦735.7 million and this resulted in a net loss for the pharmaceutical segment of the business.
Apart from the impact of imported pharmaceutical products as already discussed, other issues that affected the company’s Q1 2021 results and are likely to continue to affect its performance in future include:
- A limited product mix that has only the likes of Macleans and Sensodyne (Oral Healthcare); Pain relievers (Panadol and Voltaren); Digestive Health (Andrews Liver Salt); and Respiratory Health (Otrivin and Panadol Cold and Catarrh) all within the Consumer Healthcare segment.
- Increased competition, particularly from local pharmaceutical manufactures of similar over the counter medicines and other prescription medications and vaccines.
In addition, in October 2016, GSK Plc divested its drinks bottling and distribution business that manufactures and distributes Lucozade and Ribena in Nigeria, and other assets including the factory used for the drinks business to Suntory Beverage & Food Limited. The loss in revenue from these popular brands continues to impact its topline.
GlaxoSmithKline (GSK) is a global healthcare company and is well-known and acknowledged for its pioneering role in discovering and distributing vaccines for the likes of hepatitis A and B, meningitis, tetanus, influenza, rabies, typhoid, chickenpox, diphtheria, whooping cough, cervical cancer and many more.
It is also renowned for its manufacture and distribution of prescription medicines such as antibiotics and treatments for such ailments as asthma, HIV/AIDS, malaria, depression, migraines, diabetes, heart failure, and digestive disorders.
Perhaps GSK Plc’s fortunes may change if the company is able to obtain the parent company’s licence to manufacture GSK-owned vaccines and prescription medicines within the country while also exploring the possibility of extending the sale of its products outside the shores of the country.
Since different expertise is required for vaccines and prescription drug manufacture and distribution as compared to manufacture and sale of consumer healthcare products, perhaps another alternative may be for the company to create two separate companies with one company being a 100% vaccines and prescription drug pharmaceutical manufacturing and distribution company while the second company specializes entirely in the manufacture and sale of consumer healthcare products.
As a result of the Q1 2021 performance, the company’s earnings per share (EPS) dropped to -20 kobo compared to the 9 kobo earnings per share reported in Q1 2020. At the start of 2021, GSK Plc’s share price was ₦6.90 but the company has since lost over 10% of its price valuation as the company’s share price closed at ₦6.20 on April 30, 2021.
NB Plc’s share price and dividends keeping shareholders happy
It was not all hunky-dory for the company as its cost of sales jumped from N48.3 billion in Q1 2020 to N66 billion in Q1 2021.
Nigerian Breweries Plc (“NB Plc” or the “Company”) reported its first-quarter (Q1) 2021 results on April 23, 2021.
The company’s performance was impressive considering the headwinds it faced late in 2020 and early 2021 from inflationary pressures, poor consumer purchasing power, lethargic economic growth, and increase in the company’s beer prices which took effect from Q4 2020.
The company achieved a net revenue for the three months to March 31, 2021 of N105.68 billion compared to N83.23 billion for the same period to March 31, 2020 — a 27% increase compared to the Q1 2020 results.
It also achieved a N39.67 billion gross profit — a 13.7% increase in gross profit compared to Q1 2020.
Quarter-on-quarter EBITDA rose by 22.8% from N19.82 billion in Q1 2020 to N24.34 billion in Q1 2021. Other positive outcomes quarter on quarter were the increase in operating income (from N10.94 billion to N14.49 billion), profit before tax (from N8.3 billion to N11.51 billion), and profit after tax (from N5.53 billion to N7.66 billion).
It was not all hunky-dory for the company as its cost of sales (direct costs attributable to NB Plc’s production) jumped from N48.3 billion in Q1 2020 to N66 billion in Q1 2021, an increase of N17.7 billion. According to the company, its costs are subject to seasonal fluctuations as a result of weather conditions and festivities. As a result, the company’s results and volumes are dependent on the performance in the peak‐selling season, typically resulting in higher revenue and profitability in the last quarter of the year.
The total cost of sales, marketing and distribution, and administration expenses grew from N72.47 billion in Q1 2020 to N91.63 billion in Q1 2021 – a jump of 26.43%. This jump was largely attributable to the cost of raw materials and consumables which grew to N46.53 billion (compared to N30.2 billion for the same period in Q1 2020).
The raw materials cost pressure has been a trend since Q2 2020 driven by the rising commodity prices, foreign exchange devaluation and domestic inflationary pressures. As a result, the cost of the raw materials to net income ratio has continued to rise. This ratio was 36.3% in Q1 2020 but has risen to 44% in Q1 2021.
What may be a source of particular concern for the company is how well working capital is being managed from a liquidity and leverage perspective. The company reported cash and cash equivalents of N30.37 billion in Q1 2020, this had dropped to N18.43 billion by Q1 2021. In the same period, trade debtors and other receivables (i.e., those that owe the company for purchases that have not been paid for) had increased from N11.42 billion in Q1 2020 to N23.48 billion in Q1 2021, an increase of over 105% in just 12 months!
More worrying, in terms of magnitude, are trade creditors and other payables (i.e., those that the company owes payments for goods and services purchased) which grew from N139.2 billion in Q1 2020 to N145.41 billion in Q1 2021, a rise of N6.21 billion (or 4.5%) in just 12 months.
While the company’s loans and borrowings had reduced significantly (short-term loans in Q1 2021 was N35.65 billion versus N39.64 billion in Q1 2020; and long-term loans in Q1 2021 was N15.87 billion versus N51,81 billion in Q1 2020), the cost of borrowing, that is, interest expenses that the company paid on borrowed funds, rose from N2.7 billion in Q1 2020 to N3 billion in Q1 2021. This suggests that while short term and long-term borrowing have reduced, working capital needs are being refinanced at a higher cost or alternatively, most of the reduced short term or long-term borrowings have simply been restructured from longer-term loans to shorter-term overdrafts and commercial papers with a higher interest expense. The balance sheet as of Q1 2021 showed a liability in the form of bank overdraft and/or commercial papers of N21.44 billion which was not in the books in Q1 2020.
The first-quarter report also showed that as of March 31, 2021, the company had revolving credit facilities with five Nigerian banks to finance its working capital with the approved limit of the loan with each of the banks ranging from N6 billion to N15 billion (total N66 billion). N9 billion of the available amount was utilized at end of March 2021 (2020: Nil).
It should be noted that NB Plc’s financial statements for the 3 months ended 31st March 2021 are yet to be independently audited, so the results may be further improved or be worse, depending on the views and professional opinion of the external auditors in terms of accounting treatments and management judgement on significant transactions.
From the company’s numbers and explanations, the results are clearly driven by:
(1) Benefits from its increased pricing with the raised prices taking effect from December 10, 2020. The increases ranged from 5.2% to 6%, mainly on selected brands packaged in aluminium cans and on the 600-ml Star Larger returnable glass bottle.
(2) Volume growth in its premium brands (particularly Heineken) and non-alcoholic portfolio (particularly Maltina).
(3) Relative inelastic demand for its portfolio mix despite price increases, availability of substitutes, and stagnate consumer wages eroded by inflation. In economics, inelastic demand occurs when the demand for a product remains static or changes less than changes in price.
Overall, the company achieved outstanding results that would have confounded analysts’ estimates. Given continued inflationary trends and currency depreciation, it would be interesting to see whether turnover and profitability growth are sustainable over the remaining quarters of the year. On its financial year 2020 performance, the company paid a final dividend of NGN0.69 in April 2021 (interim of NGN0.25 paid in December 2020). If the trend is sustained, it can only be good news for NB Plc in terms of increases in its share price and dividends for its shareholders.
Heineken Brouwerijen B.V owns 37.73% of the company to which NB Plc pays annual technical service fees and royalties.
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