TheCable

Nigerian Breweries (NB) Plc, Nigeria’s biggest brewer, recorded a strong first quarter raising hopes for a big recovery this year from a deep plunge the company recorded in 2020.

Last year marked three years of sustained profit drop for the company that set profit down below the 2005 level. The company’s first quarter performance seems to make a promise or reversing the sharp fall of 2020 to a big leap in the current financial year.

NB pushed forward towards recovery in the first quarter but the challenge of rising input cost has remained. The brewing company built an after tax profit of N7.6 billion in the first quarter — which has already exceeded the full year profit figure of N7.4 billion in 2020.

The strength of the upturn in the first quarter is rooted in improving sales revenue. Inability to grow sales revenue has ruled the company’s operations over the past three years. The company pushed up sales revenue a clear 27 percent year-on-year in the first quarter from just 4 percent increase in 2020. This represents a gain of N22.5 billion in sales revenue over the period.

The challenge for the company remains the inability to contain rising cost of sales. There is an imbalance in the growth of sales revenue and the cost of producing the unit of sales, which continues to undermine the company’s profit performance.

Cost of sales rose ahead of sales revenue in the first quarter at close to 37 percent to stand at N66 billion. The company could not pass a good part of the increase in sales revenue down to profit. Input cost per naira of sales revenue was as high as 62 kobo in the first quarter compared to the company’s historic ratio of 50 kobo.

Management was however able to pass part of the increase in sales down to gross profit — which provided the spur for profit recovery in the first quarter. Cost of sales grew by N17.7 billion over the review period against the N22.5 billion gain in sales revenue.

Despite the strong growth in cost of sales in the first quarter, it represents a strong slowdown from the records of last year. Cost of sales had grown by close to twice the increase in the company’s sales figure in 2020.

Reflecting the slowdown in cost of sales, there is a change of direction for NB from a drop in gross profit last year to an increase in the first quarter. First quarter trading closed with gross profit of roughly N40 billion, which is an increase of 13.7 percent year-on-year.

Improvement in other income and moderated growth in key expenses reinforced the improvement in gross profit. Other income more than doubled at 103 percent to N368 million over the period.

Marketing and distribution expenses increased moderately at 5 percent to a little below N20 billion in the first quarter and administrative cost closed flat at N5.7 billion over the period. These developments boosted the company’s profit capacity in the first quarter.

Nigerian Breweries recorded an operating profit of N14.5 billion in the first quarter, which is an increase of about 33 percent year-on-year. This is a reversed movement from a drop of 16 percent in operating profit at the end of 2020.

Another major challenge that has remained for NB this year is rising cost of finance. An increasing trend in finance expenses recorded last year continued in the first quarter, growing by 13 percent to N3 billion at the end of the period.

However the proportion of operating profit claimed by net finance expenses has dropped from 61 percent at the end of last year to less than 21 percent in the first quarter. Increased finance cost was the biggest undermining factor to the company’s profit performance in 2020.

Going by the company’s pattern, it is likely that finance expenses would accelerate in the course of the financial year. While the company began last year with a net finance cost of N2.6 billion in the first quarter, the figure raced up to over N18 billion at the end of the year.

Despite some reduction in borrowings from over N91 billion last year, balance sheet debts remained relatively huge at N73 billion at the end of the first quarter. A further deleveraging of the balance sheet in the course of the financial year is also not ruled out in view of a major improvement in the company’s cash flow position.

The company’s profit of N7.6 billion for the first quarter represents a year-on-year growth of about 39 percent. The profit rebuilding blocks are an accelerated growth in sales, moderating input cost and a slowdown in finance expenses. These factors as well will define the company’s position on the recovery and growth path in 2021.