The year was 2013 and Nigerian Breweries (NB Plc) did something quite remarkable. It had just reported a profit after tax of N43bn and a return on equity of 41.9%. That year, NB Plc also reported revenues of N268.6bn and paid over N34bn in dividends. Also, it had just N9bn in external debt in 2013. Those were the good old days.

These days, however, the story is somewhat underwhelming and every year it gets worse. In 2019, the brewery giant reported a profit after tax of N16bn from revenue of about N323bn only. ROE is 11.54% while dividends are just about N18bn. Directors of the company have recommended that they pay out the entire profit and even more as dividends. It now has about N55bn in total external debts in 2019.

Nigeria’s brewery sector is facing a potential implosion with intense competition, harsh economy, unfavourable government policies and changing taste of consumers haemorrhaging top and bottom line. Despite splashing cash on brand ambassadors like Burna Boy and spending billions on events and advertisement, it is still finding it extremely difficult to get younger Nigerians to embrace its 21 flagship brands.

Revenue has grown by over N100bn since 2013 but it has come at a significant cost to the business. Last year (2019), the company reported it had spent about N77.6bn on marketing and distribution expenses, a whopping 24% of revenue. It spent 19.5% of revenue on marketing and distribution expenses in 2016 and 15.9% in 2013, its year of profits. Marketing and distribution expenses have almost doubled from N42.9bn to N77.6bn in 6 years.

But what else can the company do? It can’t just fold its arms against stiff competition and watch its market share and inventors' confidence erode. Management probably once in while takes solace in the performance of Guinness, thanking their stars (no pun intended) that they are much better. It’s brutal out there and the beer makers know it’s only going to get worse. Who knows who will be left standing 10 years from now? For Heineken, its majority shareholder, it keeps investing and taking a pint of their return.

The parent company with 55.9% ownership of the company will get about N10bn out of the dividend of N18bn. In addition, it earns royalties and technical fees of N7.2bn or 2.2% of revenues but 45% of profits as royalty and technical fees.

Back to 2013, the company paid N9.36bn (3.4% of revenues or 21.7% of profits ) as royalty and technical service fees. Shareholders will be reminded quite clearly that the parent company continues to invest heavily in its Nigerian subsidiary.

About N30.1bn was spent in 2019 (N30.3bn in 2018) on property, plant and equipment out of which “returnable packaging materials” was N10bn. To date, the company has spent N125bn out of its N446bn property plant and equipment budget on returnable packaging, plant and equipment. Only Plant and Machinery at N189bn is worth more. Suffice to add that it’s current market valuation of N411bn is just 1.07X total assets and 2.45X net assets.

It’s thus petrifying to be reminded that at N55 per share and 25x price to earnings ratio, Nigeria Breweries stock may well be overvalued. It’s is highly unlikely it will grow its earnings per share that aggressively. Despite paying its entire profits as dividends and more, its dividend yield will be 5% at current share price of N55.

Year to date, the stock is down 12.7% and could likely remain depressed amidst a rather gloomy economic outlook. With inflation skyrocketing and disposable income of consumers taking a hit, the horizon for Nigerian Breweries Plc is nowhere near its glory days.

SOURCE (abridged): https://nairametrics.com/2020/02/20/analysis-nigeria-breweries-the-glory-days-are-gone/