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Investors in Budweiser’s International Breweries wail as N163 billion is wiped out of market value.

About 20 months ago, January to be precise, if you were to buy an International Brewery Stock, you would have to part with about N64 per share.

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About 20 months agoJanuary to be precise, if you were to buy an International Brewery Stock, you would have to part with about N64 per share. It was the highest share price in about 5 years and in some ways, it signaled the dominance of the Budweiser in the value beer segment.  

After making significant inroads with the likes of Hero Beer and Trophy Lager, the introduction of Budweiser, the self-acclaimed king of beers suggested that the beer war was theirs to win. While they seem to be winning both the war and the customers, they are losing on two other fronts – bottom line and share price. Unfortunately, this is where it really hurts as it gives shareholders reasons to doubt the company’s strategy. 

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International Breweries’ share price has fallen by a whopping 60.7% year to date, making it the worstperforming stock on the Consumer Goods Index. Opening the year with a share price of N31.50, the stock fell to a 5-year low of N12 per share by Friday, 9th of August 2019. In this year alone, shareholders have seen about N163 billion wiped out of its market share.  

Its counterparts Guinness and Nigeria Breweries jave also lost 42.5% and 41.5% respectively year to date.

What exactly is wrong: International Breweries business strategy to fight off competition from Guinness and market leader, Nigerian Breweries has been to start a price war and focus on cheaper beer, often termed value segment by industry analysts. Unfortunately, this strategy comes at a steep cost despite its immense benefits. 

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[READ ALSO: Coca-Cola may join the Nigerian “beer war” soon]

In its half-year June 2019 interim report, International Breweries reported strong revenues of N68.6 million, 29% higher than what it reported same period in 2018.  

  • On a quarterly basis, the company’s revenue has topped N30 billion every quarter since Q2 2018. In fact, International Breweries is now on track to overtake Guinness as the second-largest beermaking company in Nigeria.  
  • Despite these giant strides, margins have continued to shrink. For example, for every N100 in sales, it spends N69 as direct cost. And out of the balance of N31, it spends another N15 on marketing and promotion, as well as N20 on operating expenses, leaving it with an operational loss.  
  • On paper, the company does not generate enough revenues to pay for its humongous N225 billion loans. 
  • Still, it managed to service interest, spending over N7 billion in the first half of this year alone. To do this, the company simply owed its suppliers, increasing liabilities to N89.3 billion from N53.9 billion. 

[READ MORE: $14 billion Dangote Refinery: uncertainty surrounds take-off]

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What this means: AB InBev, the parent company of International Breweries owns about 72% of the company while the other partners own 28%. Retail investors or minority shareholders obviously have little say in the direction the company is currently going. As they continue with their two-prong strategy of price war and cheaper brands, they will continue to lose money. But there are two major options the company could undertake which will provide the same results, thus presenting an opportunity for optimists 

  • At some point, International Breweries will need to raise capital to repay its huge loans. This could trigger a share price rally if it decides to take this route. 
  • It could as well decide to go private and buy out minority shareholders. This route, though expensive, is very plausible. 
  • It is also the favoured playbook of most foreignowned companies on the Nigerian Stock Exchange.  
  • By the time it does decide to take this route, the share price could be trading below N10.  

Patricia

Nairametrics is Nigeria's top business news and financial analysis website. We focus on providing resources that help small businesses and retail investors make better investing decisions. Nairametrics is updated daily by a team of professionals. Post updated as "Nairametrics" are published by our Editorial Board.

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Coronavirus

FG announces schedule for 4th evacuation flight from the USA 

The evacuees will be expected to present an original COVID-19 negative test result not older than 14.

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Nigeria sets conditions for border reopening, COVID-19: Nigerians in diaspora have not asked to be evacuated – FG, Attacks on Nigeria diplomatic residence, FG to engage Ghanaian government  

The Federal government has approved the fourth evacuation flight for Nigerians stranded in the United States of America for July 28.  

According to a statement that was signed by the Consulate General of Nigeria, the Ethiopian Airline with flight number ET509 will depart Newark Liberty International Airport, New Jersey on Tuesday 28 July 2020 by 21:15hrs and arrive Nnamdi Azikiwe International Airport, Abuja on Wednesday 29 July 2020 by 13:25hrs. 

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“All prospective evacuees duly registered with any of the three Nigerian missions in the USA should purchase their one-way tickets at a cost of $1250 for economy class and $2800 for business class for adult/child fare including all taxes with the usual percentage reduction for infants under 2 years,” the statement read. 

In line with the earlier announced protocols from the Nigerian Presidential Task Force on COVID-19, the evacuees will be expected to present an original COVID-19 negative test result not older than 14 days on the day of departure at the airport. 

There will also be a temperature check at the airport, and any intending evacuee with a body temperature above 38°c or any symptoms suggestive of COVID-19 will not be allowed to check-in. 

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Evacuees are also required to wear a face mask as a matter of necessity and be in possession of hand sanitizer for intermittent use during the flight, while also adhering to the instructions of the  

Furthermore, all returnees are enjoined to adhere strictly to all instructions of Port Health Services (PHS) officials and observe other entry screening protocols on arrival. 

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Hospitality & Travel

Covid-19: British High Commission to resume visa application in Nigeria

Nigerians who want to visit the UK can do so as soon as international flight operations resume.

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Covid-19: British High Commission to Resume Visa Application in Nigeria

The British High Commission in Nigeria has announced plans to resume visa processing in the country. It revealed that it will soon begin receiving visa applications from Nigerians who want to travel to the United Kingdom (UK).

This was disclosed in a public statement by the British High Commission in Abuja on Thursday, July 9, 2020.

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It said that Nigerians who want to visit the United Kingdom can do so as soon as the international flight operations resume in the country. The statement said:

“We know there are many Nigerian nationals hoping to be able to travel to the UK when flights resume, both for employment and to see family members.

“UKVI are working closely with TSL contact, our commercial partner, to reopen visa application centres that were suspended due to COVID-19. UK visa application centres are reopening in phased manner globally when it is safe to do so and when we can operate an effective service.

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“TSL contact are putting appropriate measures in place and working hard to reopen in Nigeria. We will share details of when VACs will reopen soon,”

READ MORE: US to stop issuing visa for Birth Tourism 

It can be recalled that the Federal Government had shut down the airports to both domestic and international flight operations in March as part of measures to contain the spread of the coronavirus disease.

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Following the gradual resumption of domestic flight operations, Nigerians are expecting that international flight operations might be resuming soon.

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Commodities

Nigeria’s excess crude account falls to $72 million

Nigeria’s excess crude account has now fallen by a whopping 98% in just 5 years.

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Capital market to get more tax incentives - FG , FEC reviews Ajaokuta-Kaduna-Kano gas project contract, approves $2.571 billion, FG to reduce N1.5 trillion from 2020 budget due to coronavirus

Nigeria’s Excess Crude Account (ECA) now stands at $72 million as the country continues to grapple with an unprecedented revenue crisis not seen since the early eighties. The ECA account has now fallen by about 98% within the last 5 years.

The information on the excess crude account was revealed by the Minister of Finance, Zainab Ahmed in a National Economic Council Meeting during the week. The ECA is a savings account retained by the Federal Government and is funded by the difference between the market price of crude oil and the budgeted price of crude oil as contained in the appropriation bill.

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There were major concerns last November when it was reported that the ECA balances held just $324.5 million one of the lowest balances recorded at the time. At $72 million the ECA is in low territory highlighting the effect of the fall in crude oil prices this year. Crude oil prices have crashed to sub-zero in March and have risen back o just over $40/barrel in recent weeks. However, it still remains low from Nigeria’s previous budget benchmark.

ECA in the news

About a year ago Nairametrics reported Nigeria’s Excess Crude Account has dropped to $480 million. This is as controversy continues to trail the $1 billion military spendings which were withdrawn from Nigeria’s Excess Crude. According to the Central Bank of Nigeria’s annual report for 2018, Nigeria’s crude excess account fell from $2.45 billion in 2017 to $480 million as of December 2018.

(READ MORE: Rising COVID-19 cases in world’s biggest economy falter crude oil prices)

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Just 5 years ago (August 2015) the ECA stood at $2.2 billion. This was the early days of the Buhari administration. It was $3.6 billion in February 2014, one of the highest balances on record. That same month, at its monthly FAAC, the government agreed to remove fuel subsidy from its books. Fuel subsidy is currently being borne by the NNPC.

The Controversies: Last year, the federal government under President Muhammadu Buhari was accused of mismanaging the country’s Excess Crude Account especially the $1 billion reportedly spent on military equipment.

  • The National Security Adviser (NSA) retired Major General Babagana Monguno Gen. Babagana was quoted to have disclosed that he was not aware of the whereabouts or disbursement of the $1billion drawn from the ECA by the Buhari presidency in 2017 for security purposes.
  • While controversies trail the statement credited to the NSA, with many describing it as diversion of public funds, the Presidency provided some explanations.
  • Responding to the allegations, Senior Special Assistant on Media and Publicity, Garba Shehu, disclosed that various procurements had been made for the purchase of critical equipment for the Nigerian Army, the Nigerian Navy, and the Air Force, contrary to the allegations.

Nigeria’s ECA in retrospect: In Nigeria, there are two Sovereign Wealth Funds: the Excess Crude Account and the Nigeria Sovereign Investment Authority (NSIA). Note that these two are funded by the savings earned when oil prices are at peak.

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  • Hence, as a larger chunk of revenue is appropriated for ECA and NSIA, the country’s external reserves are likely to fall.
  • Note that the sovereign wealth fund was established to address the controversies surrounding the Excess Crude Account.
  • The fund is usually expected to generate revenue to meet budget shortfalls in the future, provide dedicated funding for the development of infrastructure and saves for future generations.

ECA depleted by 98% in 5 years: A closer look at the various annual reports of the Central Bank of Nigeria shows that Nigeria’s excess crude account has now fallen by a whopping 98% in just 5 years.

Patricia
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