Rising production costs combined with spiralling interest expense have dented the bottomline of Champion Breweries Nigeria plc, as decelerating beer volume growth this year is expected to slow the beer market.
For the year ended December 2014, the company posted a loss after tax of N754.42 million, though lower than the N1.17 billion in the same period of the corresponding year 2013.
The devaluation of the naira has exposed beer makers to foreign currency risk as imported materials are expensive. This will lead to higher material costs such as imported barley, which is a major component in the manufacture of beer.
“We imagine that most of these firms will struggle to survive daunting pressure on costs, occasioned by the naira volatility and the pass-through impact of naira depreciation,” said Saheed Bashir, an analyst at Meristem Securities Limited, in a response to questions.
“Brewers and flour millers in Africa’s largest economy import more than 50 percent of their raw materials and other inputs. Even other household and personal product firms such as Nestle, PZ, Unilever and Cadbury, which had diversified and gone into sourcing local raw materials, are not exempted from the impact of the falling naira,” Bashir said.
Additionally, electricity challenge has forced most firms to rely on diesel oil which is a more expensive source of energy, also swelling production costs.
As a result of the aforementioned challenges, Champion Breweries cost of sales ratio was as high as 80.60 percent, which makes it difficult for operating profit to cover operating expenses. It also means the company spent N0.80 to generate N1 of sales.
Also denting bottomline is 8.47 percent increase in finance costs to N1.86 billion compared with N1.08 billion in the preceding year.
Despite weak consumer spending, Champion Breweries was able to record impressive growth at the topline as sales surged by 47.98 percent to N3.30 billion from N2.23 billion last year. The company’s sales may decline this year as beer volume growth is expected to decelerate in Nigeria as lower oil prices will erode consumption and Africa markets become competitive.
SABMiller plc, South Africa beer maker, which had earlier forecast beer volume growth in Nigeria of about 8 percent a year, may see that rate slow to 3 percent or 4 percent, according to one of its recent report.
Oil prices have fallen more than 50 percent in the past year, threatening growth in Nigeria ahead of presidential elections next month. Other impediments holding back the growth of Champion Breweries are the menacing security challenges in the North part of the country that has prevented firms from pushing their products to the crisis region.
The intensity of competition in the sector from firms like Nigeria Breweries and Guinness is also a threat to Champion Breweries from growth potentials.
Further analysis showed Champion Breweries current ratio, a measure of liquidity, increased to 2.41x in 2014 as against 7.3x the preceding year, which is lower than the 2.1x industry average.
Short-term obligations were met as total trade creditors reduced by 80.73 percent to N2.41 billion, which explains the poor liquidity position last year.
Champion Breweries’ share price closed at N5.16 on the floor of the exchange, while market capitalisation was N37.15 billion.
BALA AUGIE
