Champion Breweries Plc, the Akwa-Ibom based brewer reported a N754 million loss in its fourth quarter 2014 results.
High production costs and skyrocketing interest expense were to blame for the loss as decelerating beer volume growth this year is expected to slow the beer market.
The devaluation of the naira has impacted negatively on breweries as it exposed them to foreign currency risks as some ingredients used in beer manufacturing like barley are imported.
“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, analyst at Meristem Securities Limited.
He added: “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 Cussons, 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, most firms rely on diesel fuel to power their generators and that is an increased cost that weighs down on profit.
Based on the aforementioned challenges, the company’s cost of sales ratio was as high as 80.60 percent, making it near impossible to make a profit. What it means is that for every N1.00 the company makes, N0.80 is spent on costs associated with production.
Also worthy of mention is the increase in finance cost by 8.47 percent to N1.86 billion, from 1.08 billion from the previous year.
However, sales growth grew exponentially by 47.98 percent to N3.30 billion, from N2.23 billion from the previous year.
Analyst, however, are forecasting a deceleration in beer volume growth as lower oil prices will reduce consumer spending. In addition, the beer market in Nigeria is getting more competitive with the entrance of SABMiller, the South African beer maker and the second largest beer company in the world, who has been buying up breweries around the country.
The insurgency in the north of the country hasn’t helped matters as it has prevented consumer goods companies from pushing their products to the affected areas.
Champion Breweries has come a long way. The company began operation in 1974 as a limited liability company and was initially called South East Breweries Limited. It would later change its name to Cross River Breweries and in 1992, to Champion Breweries.
However, between 1991 and 1992, the company would shut its doors because it had embarked on an expansion scheme to increase production, which it lacked the capital and the technical ability to complete.
With the advent of democracy in 1999, the Akwa-Ibom state government and the company’s Board of Directors decided to reactivate the company. They went in search of investors and found a core investor in a company named Montgomery Ventures Incorporated of Panama (with offices in Switzerland). However, in January 2011, Heineken N.V. acquired Montgomery Ventures.
In December 2011, Consolidated Breweries acquired a 57 percent equity stake in Champion Breweries, which was previously held by Montgomery Ventures Inc. In December 2013, however, Consolidated Breweries 57 percent equity stake in Champion breweries was transferred to Raysun Nigeria, after Consolidated Breweries was acquired by Nigerian Breweries.
As we stated earlier, Raysun Nigeria Limited is a wholly owned subsidiary of Heineken NV. Heineken also owns Nigerian Breweries Plc.
Obinna Ajoku, an analyst at Alger Strategies, an Equities trading firm said that involvement of Heineken, the third largest brewer in the world in Champion Breweries gives confidence to investors, which in turn has produced the capital appreciation in the stock price post rights issue.
“Improvements have filtered through to the company’s fundamentals over the last year,” he added.