Nigerian Breweries Plc has taken a decisive step to address its significant financial challenges through its N600 billion rights issue, recently approved by the Nigerian Exchange Limited (NGX).
In its first-half 2024 earnings report, the company highlighted the urgency of the situation, stating, “To restore sustainable growth and profitability and enhance operational and financial stability, the Company is raising up to N600 billion in additional capital through a rights issue.
“The funds raised will be used to eliminate our foreign exchange-denominated debts and reduce our local debts, thereby mitigating the Company’s exposure to the continuing economic challenges.”
By using the proceeds to reduce both foreign and local debts, it may lower interest expenses, improve its interest coverage ratio, and enhance its liquidity position.
These improvements are expected to stabilize the company’s financial metrics, making it more resilient in the face of ongoing economic challenges and potentially reversing the current negative trends in key financial ratios.
For shareholders, the success of this rights issue could mean a more secure investment.
Current Financial Position and Challenges
Nigerian Breweries has been grappling with severe financial pressures, primarily due to the ongoing dollar scarcity in Nigeria, which has led to substantial foreign exchange (FX) losses.
These losses have significantly impacted the company’s profitability, resulting in a pre-tax loss of N145.224 billion in 2023; a stark contrast to the N17.34 billion pre-tax profit recorded in 2022.
In 2023 alone, the company recorded N153 billion in FX losses, a 482% year-on-year increase.
This financial strain was further exacerbated by a 179% surge in total debt to N342 billion, which severely weakened the balance sheet, leading to retained losses of N26.3 billion and a sharp decline in shareholders’ equity from N179.9 billion in 2022 to just N63 billion by the end of 2023.
This downward trend persisted into 2024, resulting in a pre-tax loss of N116.34 billion. This pushed retained losses to N111.314 billion and drove shareholders’ equity into a negative position of N21.216 billion.
In its first half of 2024 earnings report, the company stated: “Through our cost-saving and other efficiency initiatives, we recorded a 34% increase in Operating Profit, once again signaling the resilience and strength of our operations. However, largely due to Foreign Exchange (FX) losses arising from the devaluation of the naira and high-interest expenses driven by rising lending rates, the Loss for the Period increased by 79%
Several key financial ratios highlight the strain on Nigerian Breweries’ current financial position:
- Interest Coverage Ratio: As of the first half of 2024, the ratio was a concerning 0.92, indicating that the company barely generates enough operating income to cover its interest expenses.
- Current Ratio: At 0.45x, Nigerian Breweries is struggling to cover its short-term liabilities with its current assets.
- Debt-to-Asset Ratio: With a 62% debt-to-asset ratio, the company is highly leveraged, increasing its financial risk and vulnerability.
Likely impacts of the rights issue
The rights issue is expected to have a notable impact on Nigerian Breweries’ valuation metrics:
- Earnings Per Share (EPS): While the issuance of new shares may initially dilute EPS, the reduction in debt and interest expenses is expected to improve profitability, leading to a potential rebound in EPS.
- Price-to-Earnings (P/E) Ratio: Currently at -2.03, the P/E ratio could become more favourable as profitability improves, making the stock more appealing to investors.
- Price-to-Book Ratio: With the price-to-book ratio at -13.03, a stronger balance sheet post-rights issue could realign this ratio, reflecting a more accurate valuation and potentially driving up the stock price.
- Enterprise Value (EV) to EBITDA: Debt reduction will lower the company’s enterprise value (EV). As profitability improves, the EV/EBITDA ratio could signal that the company is undervalued, attracting more investors and driving up the share price.
Signs of Emerging Recovery
Encouraging signs of recovery are beginning to emerge for Nigerian Breweries.
In its first half of 2024 report, the company stated, “Despite headwinds, the Company has demonstrated resilience and is on the path to recovery in its operations. Revenue grew by 73% in the first half of the year compared to the same period in 2023.
“This growth was driven by strategic pricing, innovation, volume increase, and market recovery. Gross Profit grew by 42%, although this was lower than the revenue growth rate due to a 93% increase in the Cost of Goods Sold, which was driven by currency devaluation and inflation.”
A further review of the report indicates that in Q2 2024, foreign exchange losses moderated, showing a 46% Quarter-over-Quarter and 44% YoY decline, reducing the loss to N39.4 billion.
This moderation contributed to a 23% reduction in a pre-tax loss in Q2 compared to Q1, signalling that the company is gradually stabilizing.
What this means for shareholders and investors: For shareholders, the rights issue at the discounted price of N26.50 per share could be a strategic move with the potential for long-term capital appreciation as the company stabilizes and embarks on a growth trajectory.
Overall, while Nigerian Breweries faces a challenging road ahead, the rights issue marks a critical step toward recovery and could restore investor confidence, enhance the company’s valuation, and pave the way for a more stable and profitable future.