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The management of Nigerian Breweries Plc is thinking outside the box as they have expressed the intention to convert some short-term obligation into long-term debt, according to Cordros Securities Limited.
“We note that the brewer has significant exposure to foreign currency payable,” said the analysts.
There has been growing concern over the FX woes and mounting debts of Nigerian companies who operate in a tough and unpredictable macroeconomic operating environment.
Most of the firms are grappling with shrinking margins and battered profit due to the unification of the foreign exchange rate and that is even on top of weak consumer spending, rising interest rate, and spiraling input costs caused by imported inflation.
Nigerian breweries’ total payables, which is 46.35 percent of total liabilities, increased by 28.39 percent N257.79 billion as at June 2023.
Total debt surged by 107.07 percent to N253.15 billion in June 2023 from 122.25 percent the previous year.
The consumer goods giant is reliant on debt to finance its operation than the money that it sources, as analysts at Cordros Securities estimate Nigerian Breweries Debt to Equity Ratio at 1.20x as at year-end 2023 (2023E), as against 0.7x the previous year, with an average debt to equity ratio of 1.1x over 2023-2027E.
If the central bank clings to an aggressive tightening cycle to tame red-hot inflation, there will be a lot of beleaguered firms. That doesn’t portend well for the economy and the capital market.
This is because higher interest rates lift the cost of debt used in the calculation of the weighted average cost of capital (WAAC), which makes financing of existing debt difficult and very expensive to obtain new ones.
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has increased the benchmark interest rate (MPR) by 25 basis points to 18.75 percent from its initial 18.5 percent, representing the highest interest rate in 22 years.
However, Nigerian Breweries earnings fundamentals are impressive as higher beer prices and premiumsation are expected to add impetus to the top line (sales).
Analysts at Cordros Capital are optimistic about Nigerian Breweries proposed acquisition of a majority stake (80.0 percent) in Distell Wines & Spirits Nigeria Limited, as they believe this deal could drive the company’s revenue and lead to cost synergies that would be margin accretive over the medium term.
“In addition, this entry also offers NB a chance to tap into the spirit segment known for better margins and less competition,” said the analysts.
The shares of the company have not gained so far this year as it has a negative year to date (YTD) return of -9.51 percent.