Battered Nigerian Breweries Earnings Validate Price Hike Amid Exploding Inflation

The worrisomely protracted deteriorating earnings of Nigerian Breweries (NB) and other brewers in Africa’s most populous nation validates another round of price hikes in key products.

Of course, brewers have been jerking up prices because of exploding inflation and rising input costs while the devaluation of the currency that stoked unprecedented foreign exchange losses threatens to tip them over the hedge.

“The redesign of the naira notes which resulted in cash shortage that severely hampered social and economic activities nationwide set the tone for a turbulent year. High double-digit inflation rates (with food inflation at more than 30%), removal of subsidy on premium motor spirit (fuel), devaluation of the naira, and foreign exchange scarcity further exacerbated the already difficult environment for the populace and businesses,” Nigerian Breweries said.

Nigeria Breweries, Guinness, and International Breweries collectively incurred a loss after tax of N171.0 billion as at December 2023, according to data compiled by MoneyCentral.t

Nigerian Breweries plans to source more raw materials locally to mitigate foreign exchange challenges, even as it introduced higher product prices from Feb. 19.

The impact of the devaluation of the naira, resulted in a foreign exchange loss of N153 billion for NB, and the Company recorded a net loss of N106 billion during the year.

Average industry EBITDA margin stood at -2.30 percent in December 2023 from 3.40 percent the previous year.

It is obvious from the analysis above that brewers are the hardest hit among consumer goods firms from an economic downturn as the new reforms of President Bola Ahmed Tinubu such as the removal of gas subsidies and unification of the exchange rate triggered a rise in inflation and compounded the woes of fragile consumers.

The latest government statistics released Thursday showed the inflation rate in January rose to 29.9 percent, its highest since 1996, mainly driven by food and non-alcoholic beverages. Nigeria’s currency, the naira, further plummeted to 1,524 to $1.

Nigerian Breweries was able to grow its revenue by 9% compared to the previous year aided by positive price mix. However, the operating profit fell by 15% due to higher input cost and one-off reorganisation cost despite strong and aggressive cost savings and other efficiency measures.

The International Monetary Fund (IMF) slightly revised Nigeria’s 2024 growth forecast to 3.0 percent year on year (y/y) from 3.1 percent y/y (in its October ’23 WEO) for 2024.The revision reflects persistent inflationary pressure, restrictive monetary policies, and exchange rate pressure.

Analysts at Meristem in a recent report stated that Guinness has announced its decision to cease the importation and distribution of select Diageo international premium spirits products (Johnnie Walker, Singleton, and Baileys and others) by April 2024 as another fallout of the recent and further expected exchange rate devaluation in the domestic market.

“According to the company, the divestment aligns with their long-term growth strategy and corresponds with its parent company’s decision to establish a new, wholly-owned entity dedicated to managing the importation and distribution of its international premium spirits portfolio in West and Central Africa,” said analysts at Meristem Securities.

“We also expect the firm’s production costs to moderate following this divestment which should help improve profitability metrics,” said the analysts.

Battered balance-sheet needs fixing

There has been a deterioration in the balance sheet of brewers who are faced with higher debt burdens and more expensive letters of credit as foreign exchange revaluation losses means they will be raising capital to strengthen their operations.

These firms are financing their balance sheet with debt more than equity capital as the average debt/equity (D/E) ratio has hit 317.89 percent, compared to 118.50 percent in 2022, which exposes them to financial and bankruptcy risk.

A breakdown of these figures shows Nigerian Breweries has a D/E ratio of 535.05 percent; Guinness Nigeria, 116.74 percent, and International Breweries, 301.89 percent, according to data gathered by MoneyCentral.

Nigeria Breweries, Guinness, and International Breweries have combined total loans of N775.04 billion as at December 2023, which represents a 95.12 percent higher than 2022’s N396.45 billion.

“In a difficult operating environment, the Board will ensure that the Company builds on its more than 77 years’ experience of operating in Nigeria to cope with current realities. The Company will continue to be resilient and forward-thinking leveraging our broad portfolio, strong supply chain footprint and passionate workforce to drive long-term value creation for its shareholders and other stakeholders,” Nigerian Breweries said.

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