ANALYSIS: Currency Volatility Hits Brewers Hard As Cost Spikes

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The currency volatility caused by the devaluation of the naira and a slow growing economy has hit Brewers in Africa largest economy, as latest earning release showed these firms profits fall on the back spiraling cost of production.
The latest earning release of three dominant brewers, (Nigerian Breweries Plc, Guinness Nigeria Plc, and International Breweries Plc), quoted on the floor of the bourse, showed cumulative net income fell by 13.54 percent to N40.93 billion, from N47.36 billion in 2014.
Analysts attribute the decline at bottom line to a weak naira that significantly impacted on cost of sales since most of raw materials are imported to meet production.

Brewers are spending more to produce each unit of products as cost of sales ratio increased to 51.13 percent in 2015 from 45 percent the previous year. Combined cost of sales of sales moved by 11.80 percent to N188.05 billion.

“Devaluation has a negative impact on their business,” said Tajudeen Ibrahim, head – equity research at Chapel Hill Denham.

“It is on their cost of sales level the thing affected them. FX commodities are lower at the international market coming with huge volatility in exchange rate. Devaluation affected lower pricing of raw materials,” said Ibrahim.

The central bank of Africa largest oil producer has devalued the naira twice since 2014 as it seeks to curb inflation and stabilize the economy that has been battered by a more than 70 percent drop in oil price to $32 per barrel.
With the support of President Muhammadu Buhari, the head of the Abuja based bank, Godwin Emefiele, has imposed foreign exchange restriction on 41 items, pegged the currency at N197-N199 per dollar despite criticism by some analysts that such a policy is causing capital flight and suffocating businesses dependent on imported supplies.
Industry expert say the edicts have made it difficult for brewers to import machines and meet dollar obligations to suppliers, a situation that has compounded their woes.

Industry analysts also added that apart from the systematic risks swelling cost of production of Brewers, the huge infrastructure deficits such as lack of good transport system, bad roads and unstable power supply from the grid are also crimping the growth of the sector.
While Nigerian Breweries and International Breweries had sales increased on the back of introduction of cheaper brands and revenue generated from new product segments, Guinness recorded a 10 percent drop at the top lines.

“Guinness’ weak results were due to a decline in volumes for Orijin and a volume-price mix skewed to value brands,” said Tunde Abidoye, equity research analyst with FBN Capital, a Lagos based investment firm.

“Although the company recorded growth in the Malta Guinness and Guinness Stout brands, this was not enough to offset the impact of the unfavourable volume-price mix. Going forward, we believe that GN’s recent acquisitions of the distribution rights of Diageo Brand’s spirit business and the manufacturing and distribution rights of United Spirit’s Nigerian business should provide a boost to sales and earnings in the near-to-medium term,” said Abidoye.

Nigerian Breweries shares rose 4 percent to N99 at the close in Lagos, valuing the company at N787 billion. The shares are down 28 percent this year. Similarly, competitor and Diageo Plc unit Guinness Nigeria Plc also jumped 2 percent. However, International Breweries shares declined by 0.26 percent.

The post above and its ensuing comments, if any, is purely the opinion of the writer(s). It therefore should never be considered as an investment advise of any sort. If required, readers should please consult a competent professional financial adviser for any investment decision.


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