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Nigeria Breweries Plc’s rising loan profile may exacerbate its financial health



Key highlights

  • Nigerian Breweries finances its operations through a combination of debt and equity.
  • The company’s debt has increased significantly, particularly short-term debt, which may have negative impacts on liquidity and earnings.
  • Nigerian Breweries needs to generate more revenue to offset the impacts of borrowing and cost increases and improve its financial health.
  • The company’s financial ratios, such as debt-to-equity ratio and return on equity, are below industry averages, and its share price has been performing poorly, causing concerns for shareholders.

A company finances its operations with a combination of debt (money borrowed from lenders) and equity (money it raises from shareholders).

While debt is cheaper to borrow due to the benefits of tax shield, too much of it most times results in deteriorating margins as huge interest expense or finance cost erodes operating profit, making loss inevitable, especially when revenue grows at snail speed.

Following the redemption of its Commercial Paper Notes, Nigerian Breweries’ interest-bearing liabilities (excluding lease liabilities) went down to ₦27.985 billion as of 31 December 2021

However, as of December 31, 2022, the loan net book value has jumped to N122.250 billion representing a growth of 337%. Data show that the company borrowed more working capital than for expansion, as short-term borrowings were reported to increase by 401.62% in 2022, while long-term borrowings declined by 40.80%.

The Company had informed the investing public of its intention to raise up to N20 billion to support the Company’s short-term funding needs under its N100 billion Commercial Paper Program, which opened on January 11, 2023.

Continuous escalation in debt (particularly short-term debt), higher than expected CAPEX spending, and excessive dividend payments, could worsen the company’s liquidity (current) ratio already low at 0.38, and place significant pressure on earnings, which has tanked over the years.

Over the past five years NB Plc’s profit after tax CAGR stood at -7.47%, implying that its profit after tax has declined on average by 7.47% a year.

In Q4 2022, the company reported a loss after tax of N1.607 billion, though overall, the Group recorded a marginal earnings growth of 4.06% year-on-year to N13.187 billion for the 2022 FY.

A cursory review of the company’s financial statements show the obvious impact of the short-term borrowing given that total cash from operations generated after working capital changes was severely constrained, declining by 54% year-on-year to N59.738 billion in 2022.

Also, the company’s net cash from financing activities for the period increased to N82.059 billion in 2022 due to the proceeds from new loans and borrowing received during the period, which totalled N161.047 billion.

Conversely, the company spent N66.78 billion repaying loans and borrowings, N4.65 billion paying interest, N7.586 billion paying dividends during the period, and N97.861 billion for the acquisition of property, plant, and equipment.

This is evident given that the company’s free cash flow declined year-on-year to -N81.155 billion. The free cash flow tells how much cash a company has left over after paying its operating expenses and maintaining its capital expenditures. A negative free cash flow may be a pointer to poor financial health within a period.

The overall impact is that the company’s debt-to-equity ratio went up 67.95% as of December 2022, implying that NB Plc had N0.68 of debt for every Naira of equity. Though this may seem safe, of concern is the growth.

The company’s debt-to-equity ratio was 16% or 0.16 in 2021 and then jumped to 68% in 2022. The company’s total liabilities to total assets (another capitalization ratio) stood at 0.71 times or 71%, and a ratio above 50% means there is more debt than equity in the balance sheet of an entity.

At the rate the company is going, it needs to generate more revenue in order to offset the consequent impacts of borrowing and the continued increase in the cost of sales, distribution, and admin expenses on its earnings, return to shareholders, and overall financial health.

In 2022, the group’s earnings per share increased marginally by 0.64% to N1.58 year-on-year. But over the past 5 years, it has declined at a compounded annual growth rate of -4.02%.

Its return on equity at 7.3%, trails the industry average return of 13.8%, despite increased leverage.

The company’s share price has been bearish. Last year, the share price posted a year-to-date loss of 18%, a performance that trailed the All Share Index performance of 19.98%. Since this year, the share price has lost 7.32% YtD. Shareholders’ worries are compounded by the fact that NB has lost 8% of the stock’s value from February 24th to date.