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Nigerian Breweries: Cost pressures strain H1 2019 performance

@NBPLC in its recently released H1 2019 financials reported marginal 1.4% decline in Revenue to N170.2bn from N172.7bn in H1 2018. While the company did not report Gross Revenue and excise duty payments, we believe the decline in Net Revenue must have been impacted by higher excise duties payment with the second phase of advalorem excise duty system implemented in June.

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Nigerian Breweries considers price increase as excise duties hike bites, Nigerian Breweries annual general meeting AGM

Nigerian Breweries (NB) in its recently released H1 2019 financials reported a marginal 1.4% decline in Revenue to N170.2 billion from N172.7 billion in H1 2018. While the company did not report Gross Revenue and excise duty payments, we believe the decline in Net Revenue must have been impacted by higher excise duties payment with the second phase of advalorem excise duty system implemented in June.

On a q/q basis, Net Revenue improved by 4.4% to N86.9 billion in Q2 2019 from N83.2 billion in Q1 2019. On an annualised basis, reported Revenue of N340.4 billion beat our 2019e of N332.0 billion, although we expect seasonality effect for beer business in Q3 to bring down Revenue in line with our estimates.

Cost of Sales adjusted for depreciation, however, climbed marginally by 1.5% y/y to N87.7 billion in H1 2019 from N86.4 billion in H1 2018. Higher Cost of Sales was driven by a 1.1% y/y uptick in raw materials cost. Consequently, Gross Profit declined by 4.3% y/y to N82.5 billion in H1 2019 from N86.2 billion in H1 2018. On a q/q basis, Gross Profit climbed higher by 4.3% to N42.1 billion in Q2 2019 from N40.4 billion in Q1 2019.

Operating Expenses (adjusted for depreciation) climbed higher by 6.1% y/y to N42.3 billion in H1 2019 from N39.8 billion in H1 2018. The rise in Operating Expenses came as a result of a 10.9% y/y rise in Marketing & Distribution (adjusted for depreciation) Expenses to N32.9 billion in H1 2019. We believe the increase in Marketing & Distribution costs was largely due to NB’s drive to reclaim lost market share. Meanwhile, Administrative Expenses (adjusted for depreciation) recorded a double-digit decline of 14.8% y/y to N6.3 billion in H1 2019 from N7.4 billion in H1 2018 due to a reduction in staff headcount following the right-sizing exercise done last year.

Against the backdrop of higher Operating Expenses and a declining Gross Profit, EBITDA dipped by 13.3% y/y to N40.2 billion in H1 2019 from N46.4 billion in H1 2018. Operating Expenses were significantly higher in Q2 (up 28.2% q/q), thus, EBITDA for Q2 2019 slumped 16.0% q/q to N18.4 billion from N21.9 billion in Q1 2019. EBITDA margin slipped lower by 3.2ppts y/y to 23.6% in H1 2019 from 26.9% in H1 2018. The spike in Q2 2019 Operating Expenses significantly impacted EBITDA margin in Q2 2019 which declined by 5.1ppts to 21.1%. A 6.4% rise in Depreciation & Amortisation Charge accelerated the decline in Operating Profit, falling 22.9% y/y to N24.0 billion for H1 2019 from N31.2 billion in H1 2018.

Net Finance Cost increased 24.2% y/y to N5.1 billion in H1 2019 from N4.1 billion in H1 2018 on the back of lower Interest Income (down 9.6% y/y to N198.5m) and higher Interest Expense (up 22.5% y/y to N5.3bn). NB’s higher Interest Expense was driven by higher Interest-Bearing Liabilities (up 57.5% y/y to N43.8bn) due to the recent Commercial Paper issuances done by the company to finance working capital. While Tax Expense declined 33.2% y/y N6.1 billion, Net income slumped 27.8% y/y to N13.3 billion in H1 2019 from N18.4 billion in H1 2018. EPS stood at N1.67/s in H1 2019 as against N2.31/s in H1 2018. On an annualised basis, EPS is on track to beat our estimate (Annualised actual – N3.34 vs CSL Estimate – N2.60), however, we note that seasonal factors which would see Q3 record weaker Earnings would align EPS with our 2019 estimate.

We have a target price of N87.90 for Nigerian breweries with a HOLD recommendation on the stock.

Nigerian Breweries result

Nigerian Breweries result

About CSL Stockbrokers Limited: CSLS is regulated by the Securities and Exchange Commission, Nigeria. It is a member of the Nigerian Stock Exchange.

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    Book of States 2020: Vast resources, low industrial development

    State governments have been heavily reliant on FAAC distribution to meet recurrent expenditure, thus making no room for capital spending. 

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    Oil Price Crash: Governors to meet on budgetary and economic issues, Insecurity: Governors to meet on Wednesday over rising insecurity

    The Nigerian Investment Promotion Commission (NIPC) in a recent report titled “Book of States 2020” highlighted the investment prospects of the 36 states of the federation including the Federal Capital Territory (FCT) to steer attention to the subnational investment opportunities in Nigeria. We note that the report is an outcome of a partnership between the commission and the Nigeria Governors’ Forum (NGF) to showcase the key investment opportunities for each state.

    The report focused on the key areas of physical capital (airports, railway stations and seaports), resources (natural and minerals) and demography (population and labour force) of each state including their Internally Generated Revenues (IGRs), budget spending and household consumption.

    While we acknowledge the decrepit infrastructure as a major hindrance to the growth of businesses and economic prosperity of many states, we note the little emphasis placed by the states on financing capital projects to attract private sector investments. Over the years, state governments have been heavily reliant on FAAC distribution to meet recurrent expenditure, thus making no room for capital spending.

    The truth is that as long as state governments do not make desperate efforts to develop their internal revenue-generating capacity, the states in the country would continue to operate an inefficient rent collection system where they rely solely on FAAC allocation to meet basic needs such as paying workers’ salaries.

    In our view, we believe the efforts to revive the ailing status of many states depend on the effectiveness and soundness of policies made to propel investments. Currently, Nigeria has enormous potentials to improve tourism given its ample amount of resources to attract both local and international tourists. Many countries in the continent such as South Africa, Kenya and Morocco have made great fortunes from tourism.

    Over 50% of the states have recorded no foreign direct investments over time due to little or no requisite infrastructure needed to attract capital inflows amid untapped resources in these affected regions. Also, we believe the Federal Government needs to relax its control on some of the state-owned resources to enable the states better exploit these resources.


    CSL Stockbrokers Limited, Lagos (CSLS) is a wholly-owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

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    How EFCC’s proposed lifestyle audit will affect your finances

    While enforcing lifestyle audit, the relevant agencies must take note of the fact that social media influencing has become a serious business in Nigeria.

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    Access, GTBank, two others pay PWC & EY N1.5 billion as Audit fees in H1 2020 

    On Wednesday, the 24th of March 2021, Lauretta Onochie, a presidential aide, took to Twitter, to announce the legality of lifestyle audit in Nigeria, with a view to tackling corruption. She also mentioned that those who flaunt lifestyles they cannot afford can now be investigated by any of the antigraft agencies such as the Economic and Financial Crimes Commission (EFCC) and Independent Corrupt Practices Commission (ICPC) to give information about their source of wealth.

    Some Nigerians have already expressed delight in the government’s action, hailing it as a great move, while others have heavily criticized it, adding that such lifestyle audit should be for those in public offices and those holding political positions in Nigeria.

    READ: $1.3 billion Malabu oil field sale was lawful – Former Shell Executive

    The implication of lifestyle auditing

    Lifestyle audit basically involves an inquiry into the lifestyle of individuals for the purposes of revealing unreported cases of unjust self-enrichment and suspicious affluence that may suggest that such individual perpetrates fraud or is involved in corrupt activities. In carrying out such an audit, there is a comparison of the living standards of the said individual with his known source of income.

    There is also an inquiry into the consumer index of such an individual, which includes the income of his or her spouse, the monthly expenses of the family, the declared assets of the family and related personal expenditure of such individual. It is considered a major tool in fighting corruption.

    Whether such audit is conducted in the public sector, i.e. on those in public offices or employees of government, or whether it is carried out in the private sector, the major goal of a lifestyle audit is to consider whether or not an individual is living beyond his or her legal means, and whether there is a possibility that such lifestyle is funded by corruption or fraud.

    If during the course of the audit, the individual is unable to prove the source of funds or income, such funds may be taxed as undisclosed income, and if it is discovered during such investigations that the individual is involved in fraud or any criminal related activity, such individual may be prosecuted.

    READ: FBI ranks Nigeria 16th in its 2020 International Crime Victim Countries

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    Is Nigeria the first to legalise lifestyle audit?

    Countries like Kenya and South Africa have been carrying out lifestyle audits. Kenya for instance has embraced lifestyle audit as a means to reduce corruption in both the private and public sectors. Government institutions in Kenya audit their staff by comparing the lifestyle of such staff with their income, in order to reveal any inconsistencies.

    In the private sector, lifestyle audits are also carried out on employees who declare their wealth, allowing for an investigation into the existence of any questionable source of income or revenue.

    The Ethics and Anti-Corruption Commission of Kenya in 2008 took a financial controller who was earning Sh306, 000 a month to Court. But the EACC said he owned seven houses or plots, four vehicles, six bank accounts (one in London) and had Sh4 million in cash in his house. What the EACC wanted was for the court to agree he had “unexplained assets” and that the assets should be seized. The lower court rejected the EACC’s case on a variety of grounds based on the Constitution. However, the Court of Appeal held that the Financial Controller had not shown how he had acquired some of the assets.

    READ: 6 types of pension plans: Deciding which is right for you

    In 2018, the Kenyan Government intensified the war on graft by announcing that all public servants will undergo a compulsory lifestyle audit to account for their sources of wealth. In an article published by the Katiba Institute, Kenya, on 27 June 2018, it was reported that various corruption scandals have been exposed and over 40 persons have been arrested as a result of corruption scandals resulting from lifestyle audit in Kenya.

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    In South Africa, the government has carried out lifestyle audit for the public sector in order to curb corruption and fraud. However, lifestyle audit in South Africa is not limited to the public sector as the South African Revenue Service (SARS) since 2007 has been carrying out lifestyle audit on private individuals and using it for several criminal investigations. The SARS encourages members of the public to report people living a lifestyle beyond their known means of income. The SARS would usually ask the individual to fill a questionnaire to aid them in their inquiry.

    Business Insider South Africa has stated in an article published recently, that SARS has been using lifestyle audits on private individuals since 2007 and they have used it to conduct thousands of criminal investigations.

    READ: Corruption erodes the constituency for aid programmes and humanitarian relief – IMF

    Possible challenges Nigeria may face

    While enforcing lifestyle audit in Nigeria, the relevant agencies may need to take note of the fact that social media influencing has become a serious business in Nigeria today. What usually happens is that these influencers present a lifestyle to the public which they may not be able to afford or which cannot be said to be at par with their income.

    The reason for such presentation is to get more followers on social media and attract brands and businesses that would usually enter into an agreement with them to influence the public to patronize the products of such brands in return for a fee. The question now arises, what becomes the fate of such influencers in the face of the legalizing of lifestyle audit in Nigeria? What effect would it have on their businesses since they are not considered illegal?

    In an interview with Elsie Godwin, a YouTube content creator, Lekan Bamidele, the Managing Partner of Lekan Bamidele & Co stated that there is a huge possibility that lifestyle audit may lead to an invasion of the privacy of the audited individuals which is an infringement of their fundamental human rights as guaranteed by the Constitution of the Federal Republic of Nigeria 1999 (as amended). This is because, in carrying out such audits, the private properties of such individuals such as their phones, bank statements etc. may be looked into even without their consent.

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    He also added that lifestyle audit may result in abuse by the authorities, as the Nigerian Police having no right to conduct lifestyle audit on Nigerians may want to usurp the powers of the relevant agencies; and that lifestyle audit should generally be restricted to public officials.

    However, based on the provisions of the Nigerian constitution the right to privacy is not absolute and an invasion of privacy would not be considered as an infringement where it is for the purpose of public morality, public order, etc. The actions of the agencies carrying out such audit may be considered as falling under this exception and would not be illegal.

    Moreover, since Nigeria still battles with issues such as police brutality and sometimes, unwarranted profiling which led to the recent #EndSars protest, lifestyle auditing may give unscrupulous officials the leverage to treat citizens with indignity and may also lead to the abuse of the entire auditing process. It, therefore, opens a lot of Nigerians to the risk of harassment and unnecessary profiling.

    Additionally, it is a notorious fact that one of the major problems facing Nigeria is corruption. Corruption is a phenomenon that has eaten deep into the systems and permeated every level of governance in the country and even the agencies of government. It may, therefore, pose a major threat to the smooth running and enforcement of lifestyle audit in Nigeria.

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    Conclusively, the relevant body or agencies should take these and more into consideration, and a formal structure should be put in place, and legislation enacted, in order to effectively carry out lifestyle audit in Nigeria. Also, there should be no overlapping of duties in the enforcement. That is, only agencies that are vested with such powers should exercise them. This would ensure that Nigerians are not faced with a situation where just any person would claim the right to investigate the source of their income.

     

    Written by Nwankwo Tochukwu

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