By CSL Research
In its recently released financial reports for 9M 2019, International Breweries (IntBrew) reported a 16.7% y/y growth in Net Revenue to N97.3bn in 9M 2019 from N83.3bn in 9M 2018. On a q/q basis, Revenue dipped 14.6% q/q to N28.6bn on the back of fewer festivities within the quarter. Comparing Q3 2019 to Q3 2018 (an attempt to see Revenue trends ex the impact of seasonality), we observed weakness in Q3 2019 Revenue as it declined 5.3% y/y compared to Q3 2018. Revenue was also down in Q2 2019 compared to Q1 2019.This may signal a slowdown in revenue growth for IntBrew who eroding competitors’ market share using discount pricing strategy.
Cost of Sales (adjusted for depreciation) grew 29.0% y/y to N55.1bn in 9M 2019 from N42.7bn in 9M 2018. The growth in Cost of Sales was driven by a 28.0% growth in Raw material cost which is faster than the growth in Revenue which implies increasing cost per unit. We believe the growing cost is due to higher barley prices. Consequently, Gross margin declined, down 5.4ppts y/y to 43.4%. Nevertheless, Gross profit was up 3.8% y/y to N42.2bn in 9M 2019 from N40.7bn in 9M 2018 while it dipped 22.3% q/q to N11.0bn in Q3 2019.
Operating Expenses grew significantly, up 33.1% y/y to N33.1bn in 9M 2019. The rise in Opex was driven by surge in Marketing & Promotion Expenses (up 36.0% y/y) and Administrative Expenses adjusted for depreciation (up 27.3% y/y). Marketing & Promotion Expenses was higher for 9M 2019 as all key line items – Transport & Distribution (up 36.5% y/y), Employee Benefit Expense (up 33.9% y/y) and Advertising & Promotion Expense (up 36.1% y/y) – were up for the period. Meanwhile, higher Staff and Business Running costs drove Administrative Expenses higher. Consequently, EBITDA fell 48.6% y/y to N8.0bn in 9M 2019 from N15.6bn in 9M 2018 while EBITDA margin declined 10.5ppts to 8.2% in 9M 2019.
Furthermore, Depreciation Expense grew significantly, up 61.5% y/y to N20.3bn in 9M 2019 from N12.6bn in 9M 2018. We note the jump in Depreciation Expense is due to the commencement of booking depreciation charge on Property, Plant & Equipment associated with the opening of the Sagamu plant. These assets were previously classified as Assets in Course of Construction and were not depreciated. Against this backdrop, IntBrew recorded a Loss before Interest & Tax of N10.9bn in 9M 2019.
IntBrew’s bloated debt book continues to pressure earnings as Net Finance cost increased 45.8% y/y to N13.1bn in 9M 2019 from N9.0bn in 9M 2018. The company took additional short-term debt of N29.0bn in 9M 2019, bringing outstanding long-term debt obligation to N153.5bn and debt to equity to a precarious 13.0x. Consequently, loss before tax worsened to N24.1bn in 9M 2019 from N9.2bn in 9M 2018 while a tax credit of N7.6bn cushioned loss after tax to N16.4bn.