NBPlc 2019H1: Low Valuation Amidst Worrisome Revenue, Profit Decline

Company: Nigerian BreweriesPlc (NB)
Rating: Sell
Current Market Price: N55.00
Latest Dividend: N1.83
Year High: N83.20
Year Low: N55.00
Fair Value: N34.63
Equity Analyst: Tunde Segun Jeariogbe

Key Investment Ratios
• This report on Nigerian Breweries explored the half-year financial indices for the period ended June 30, 2019 so as to effectively rate the result. It was compared with that of the similar period of the year 2018.
• At a glance, the result is a poorer performance, when compared with the similar figures released at the end of the first six months of 2018.
• It is, therefore, necessary to identify few clear factors impacting the company’s performance both positively and negatively.
 Negative factors working against the growth of Nigerian Breweries performance indices are;
 Stiff competition among industry peers.
 Weak consumer purchasing power.
 Very harsh business climate.
 Unfriendly interest rates, which to a large extent was avoided with recurrent issuance of commercial papers.
 Transportation challenges with infrastructure deficit across the country.
 Insurgency, which made it more expensive and almost impossible to move products to most of the northern part of Nigeria.
 Epileptic power supply, forcing many manufacturing companies to generate their own power, thereby veering from their core business at higher costs.
 These notwithstanding, the giant brewer also is a formidable competitor, that has so much going for it, especially:
 Large market size (population) in Nigeria.
 A good number of products and continuous product innovations over the years.
 Consistent growth in the value of most of its brands, amongst several others.

Company figures
• The turnover figure dropped marginally against the corresponding quarter by 1.43%. The current Turnover figure is N170.19 billion, as against the N172.65 billion of prior half-year.
• Cost of Sales was seen to have maintained an almost equal portion of the Turnover through the two periods compared. Please note that CoS is currently valued at N98.54 billion as against N172.65 billion.
• Operating profit dropped by 22.62% at the current value of N24.46 billion, compared to N31.61 billion in 2018.
• Nevertheless, Operating Expenses stood above the comparable period by 6.05%. Estimated Opex is N47.61 billion, versus N44.895 billion in 2018.
• Through the first six months of 2019, the brewery giant reported Finance Cost of N5.28 billion, compared to N4.31 billion posted in the 2018 half-year result.
• Profit before Tax is valued at N19.37 billion, the same as a 25.59% drop when compared to the N27.51 billion of 2018.
• Profit declared at the end of the period stood at 27.81% below that of the comparable period, as N13.29 billion was achieved as profit as against the N18.51 billion in 2018.

• Current Assets is currently valued at N88.65 billion, this is same as 8.83% above the N81.46 billion estimated at the end of the first six months of 2018.
• Non-Current Assets held by the giant brewer is currently valued at N298.27 billion as against N288.33 billion in the corresponding period of last year.
• Current-Liabilities stood at N142.70 billion, same as 0.29% below the N143.12 billion stated in its 2018 half-year result.
• Non-Current Liabilities climbed 43.15% up to N78.99 billion, as against N55.18 million.
• Net Assets posted for the period, therefore, stood at N165.22 billion from N171.49 billion.
• Retained Earnings dropped by 6.66% to N88.89 billion versus N93.09 billion in 2018.

Financial Strength/Solvency Ratios
• Debt Ratio is currently estimated at 0.57x, 6.85% above the 0.54x estimated in the similar period of 2018. This implies that Total Liabilities is same as 57% of Total Assets.
• Total Debt to Equity was equally estimated at 1.34x as against 1.16x estimated in the comparable quarter. This simply implies that more debt was used to finance the company’s assets through the period.
• It was established that Equity is same as 43% of Nigerian Breweries’ Assets Value, estimate from 2018 half-year performance indices yielded 46%.
• Nevertheless, we can conclude that Nigerian Breweries shares are fairly liquid although the estimated Beta stood slightly below market beta.

Profitability Ratios
• EBITDA margin estimated for the period stood at 14.37%, same as 21.50% below the 18.31% estimated from the corresponding quarters’ numbers.
• Pre-Tax Margin equally dropped by 28.57% to 11.39% from the 15.94% estimated at the end of 2018 half year.
• Effective Tax Rate was fairly stable within both periods compared in this report.
• As noted above, Nigerian Breweries maintained a stable Cost of Sales over the two periods compared in this report.
• Return on Equity stood at 8.05%, as against 10.74% of 2018.

Efficiency Ratios
• Operating Expenses to Turnover value is same as 27.79%, this is 7.58% improvement from the 26% estimated from the 2018 half-year financial indices.
• Turnover to Total Assets Ratios stood at 43.98%, compared to the preceding half-year’s 46.69%, a 5.79% efficiency drop when compared to estimate from the 2018 half-year performance indices.
• Working Capital Ratio a ratio that indicates a company’s effectiveness in using its working capital was estimated at -3.15x a 12.44% growth from the -2.80x estimated in the similar period of 2018.
• To further determine the management’s efficiency; we tested the Working Capital Ratio, which confirmed that Current Assets is lower than the current liabilities, although a marginal growth in this efficiency ratio from the previous quarter was noticed.

Investment/Valuation Ratios
• At the end of the 2019 half-year business cycle, the management achieved a 27.09% drop in earnings per share from the previously estimated N2.30.
• P/E-Ratio slipped by 27.09% having moved to 33.08x from 45.37x. Please understand that the high P/E-Ratio is an indication of positive investor sentiments in the shares of Nigerian Breweries.
• The said Earnings per Share yielded 3.02% of the current market price of Nigerian Breweries on the exchange as at the time the result was made available to the investing public.
• The Book Value of NB Plc is currently estimated at N20.66, which is far below the market value of the company on the floor of the exchange.
• Confirming and over-priced status of Nigerian Breweries shares on the floor of the exchange is the Price to Book Value which stood far above unity (2.66x).

Undoubtedly, the financials of Nigerian Breweries Plc is not impressive in any way, given the consistent drop in sales revenue and profit, which is now assuming a very worrisome dimension. Since this report seeks to guide and improve investors’ precision, we have been very conservative while picking our valuation techniques. Amongst other things, we considered the latest cash dividend (interim dividend inclusive), the dwindling growth status of its earnings/dividend, ROE, at 10% COE. Thus, we have fairly valued each unit of Nigerian Breweries Shares at N34.63, and have rated it a Sell.