International Breweries: Drunk By Debt, Wobbling Out Of Losses

International Breweries Plc (IBPLC) is a proud part of the world’s largest brewer, Anheuser-Busch InBev, (ABInBev); the world’s largest brewer with over 400 beer brands and over 50 years in the brewing business.

However, over the last four years the Nigerian entity, International Breweries has struggled to grow its bottom line. A four-year, periodic analysis between 2018 and 2021 showed a steady growth trajectory with consistent year-on-year growth in revenue.

One of the major factors contributing to the losses is operational costs caused by exchange rate fluctuations, devaluation, high financial leverage, COVID-19 disruption in 2020, etc. The losses and net profit margins wiped out its retained earnings, leading to an accumulated loss of N35.958 billion in 1Q 2022; though a marginal drop of 1.97% from 2021FY accumulated loss of N36.679 billion due to the profit recorded in 1Q 2022.

For instance, in 2019, cost of sales rose by 26.81% to N107.144 billion from N84.494 billion in 2018. In 2021, it rose by 28% to N135.99 billion from N106.32 billion in 2020, driven by N108.28 billion in materials consumed and allocated to overheads reported in 2021 from N79.9 billion in 2020. Operating expenses rose by 32 per cent to N53.6 billion in 2021 from N40.57 billion in 2020, attributable to 29% increase in administrative expenses, and not only in 2021, had administrative expenses grown, but in previous years too.

Curiously, while earnings were negative, the balance sheet of the Brewery was expanding. Total assets of the company moved to N469.053 billion in 2021 from N310.308 billion as at December 31, 2018, with equity accounting for 28.85% and total liabilities accounting for 71.15% as at December 31, 2021. As at March 31, 2022, 69.63 percent of the company’s assets were financed by liabilities.

Some respite?

Things seem to be improving this year based on the released 1Q 2022 results as the company returns to the path of profit. The unaudited first quarter, 2022 financial result and accounts showed Profit After Tax of N721.167 million from loss after tax of N2.579 billion reported in Q1 2021.

The growth in earnings was driven by revenue growth, reduced cost of sales and growth in finance income. While revenue grew by 47.63% to N57.521 billion from N38.964 billion in Q1 2021, cost of sales grew slower by 15.67% to N37.567 billion from N32.479 billion in Q1 2021, to position gross profit at N19.954 billion, representing an increase of 207.65 per cent from N6.89 billion reported in Q1 2021.

The result is an earnings per share of N0.03 up from a loss of 10kobo in the first quarter of last year. Nevertheless, the company continues to struggle with lower margins fueled by its high operating cost and debt service cost. The operating profit margin was just 6.4%. Exchange rate fluctuations and high-interest expenses look likely to continue to condense the operating profit margin in the near future except it does something drastic.

Despite these challenges, the company’s stock is picking up. The company’s share price has gained 65.66% (N3.25 per share) from year to date, starting the year at N4.95, and traded at N8.20 on May 20, 2022. However, the Brewery shares have returned about 86.36% gains for investors who bought them at their 52-week low trading price of N4.40 per share.

But now the company has returned to the path of profit after 4 years of losses, sustaining it is what should be its focus, especially in this turbulent, high inflation and interest rates environment occasioned by the Russian-Ukraine related food supply chain and energy crises and resurgent COVID-19. Its debt profile is re-surging again after it was brought down to N110.66 billion in 2020 from N263.6 billion as at December 31, 2019. Owing to high debt profile in 2019, the company announced plans for a rights issue at an offer price of N9 per share. The right issue, which was completed in January 2020, was used to deleverage the company.

It is no surprise that the company’s earnings have been negative over the last four years. Over these years, operating expenses have increased due to unstable foreign exchange, a hike in inflation rate and economic disruptions due to COVID-19 pandemic.

Nonetheless, proprietary brand innovation, market penetration, robust revenue and costs/risk management policies, stable and experienced Board are needed to navigate this turbulent environment.