Champion Breweries Plc is planning to raise capital through a public offer aimed at both meeting Nigerian Exchange (NGX) listing requirements and funding its expansion.
At the company’s “Facts Behind the Figures” presentation on October 15, 2024, the Managing Director Dr. Inalegwu Adoga stated, “We intend to issue new shares to the public to achieve the required NGX free float of 20%. Addressing the free float deficiency will help us raise funds to complete our current infrastructure upgrades, increase our capacity to meet existing demand, gain operational efficiency, and enhance profitability.”
However, looking at the company’s financial performance, market conditions, new ownership, etc., raises key questions about whether this offer presents a compelling investment case.
EnjoyCorp acquisition
Following its acquisition in June 2024, EnjoyCorp now holds an 86.4% stake in Champion Breweries, cementing its control. Akwa Ibom State retains a 10% interest, while the public holds the remaining 3.6%.
This acquisition has brought in fresh resources and expertise, which Champion Breweries hopes will drive operational efficiency and profitability.
However, the key question remains whether EnjoyCorp’s involvement will provide the strategic edge necessary to compete effectively in the dominated market by bigger players and deliver sustainable financial growth.
Assessing the financial performance trend and return to shareholders
In the first nine months of 2024, Champion Breweries posted a pre-tax profit of N178 million, a significant recovery from the N91 million loss recorded in the same period of 2023.
In 2023, despite the challenging environment, marked by policy shifts that led to pre-tax losses, increased retained losses, and erosion of shareholders’ funds across the consumer goods sector, the company managed to close with a pre-tax profit of N445 million.
Over the past five years (2019–2023), the company has sustained profitability growth, with pre-tax profit increasing at a compound annual growth rate (CAGR) of 16%.
However, high operating costs remain a persistent issue, compressing profit margins and limiting the company’s ability to translate revenue growth into sustainable returns.
For the nine-month period in 2024, the gross profit margin stood at 41%, but only 8.16% of that was converted into operating profit, as over 80% of gross profit was consumed by selling, distribution, and administrative expenses.
This trend highlights the company’s ongoing struggle with operational costs, a challenge that persisted in 2023, when the operating profit margin fell to 4.75%, down from a healthier 18.5% in 2022.
Looking at its historical metrics, the company’s struggle with expenses is clear. Over the past five years, on average over 75% of gross profit has been absorbed by operating expenses, limiting the operating profit margin to an average of 10% per year. Similarly, the pre-tax profit margin has averaged 9.7% over this period.
The impact of these compressed margins has been evident in the return on equity (ROE), which has averaged only 6.19% over the last five years and 0.19% for the first nine months of 2024, signalling the company’s challenge in delivering strong returns to shareholders.
Moving forward, improving operational efficiency and reducing costs will be crucial for Champion Breweries to enhance profitability and bolster investor confidence.
Without significant improvements in these areas, the company may struggle to deliver meaningful returns and justify future investments.
Also, the Nigerian brewery market is highly competitive, with major players like Nigerian Breweries and Guinness Nigeria holding dominant positions.
Additionally, the sector faces challenges such as inflation, rising costs, and declining consumer purchasing power, leading to pre-tax losses, increased retained losses, and erosion of shareholders’ funds.
While Champion Breweries has highlighted cost-saving measures, including a shift to renewable energy and the localization of supply chains, the true test will be assessed in future financial results.
If the company can effectively rein in costs while maintaining growth, it could boost profitability and restore investor confidence. However, failure to manage rising expenses could erode that potential and undermine shareholder returns.
The company stated that it paid a bonus dividend for the first time in years and expressed a commitment to annual dividend payments moving forward.
However, despite this commitment, the key question remains: can the company achieve a 10% dividend yield? To meet this target, EPS would need to grow significantly to support higher dividend payouts.
With a trailing twelve-month EPS of N0.07 and considering both the current share price of N3.42 and the 5-year high of N5.02, a significant increase in earnings would be essential to achieve a higher dividend yield and, by extension, a healthy total return, which is important to investors.
The bearish share price trend compounds these concerns. In 2023, the stock declined by 25%, followed by an 18% YtD drop in 2024, reflecting weakening market sentiment.
With rising costs and slim operating margins, achieving the required EPS for a higher dividend yield seems highly ambitious. This would require either a dramatic improvement in profitability or substantial cost-cutting efforts.
Overall, given these factors, sustained financial improvement is crucial to garner and maintain confidence in the public offer and attract investor interest.
Moreover, without clearer projections of profitability, consistent dividend payments, or meaningful share price appreciation, the public offer may not present a compelling investment case.
While the company’s expansion strategy and new ownership reflect ambition and potential, investors must carefully evaluate whether Champion Breweries can effectively leverage the operational improvements and new resources to generate sustainable profits and deliver meaningful returns.
Until clearer progress is observed, investors are encouraged to proceed with caution, closely monitoring future earnings and the effectiveness of the company’s strategic execution.