Lagos, Nigeria, 09 April 2021 – GCR Ratings (“GCR”) has upgraded the national scale long term and short term Issuer ratings of Nigerian Breweries Plc to AA+(NG) and A1+(NG), respectively, from AA(NG) and A1+(NG), with the Outlook accorded as Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Nigerian Breweries Plc||Long Term Issuer||National||AA+(NG)||Stable Outlook|
|Short Term Issuer||National||A1+(NG)|
The ratings accorded to Nigerian Breweries Plc (“NB” or “the Company”) reflect its leading market position in the Nigerian brewery industry, strengthened by the operational and strategic benefits from being a subsidiary of Heineken N.V. Group (a major global brewing group) with operations in more than 70 countries. The company also evidences strong financial position despite some weakness in earnings.
The ratings are supported by NB’s strong competitive position, large distribution network, extensive customer base and well diversified product offering within the alcoholic beverages category, with the company enjoying a 58% market share in the beer industry. This is complimented by technical and financial support from Heineken N.V. Group. Nevertheless, the company’s products are balanced across alcoholic and non-alcoholic brands, albeit remaining concentrated in the beverages category, while geographic diversification outside of Nigeria is limited.
Earnings are a neutral factor to the rating. While GCR has taken cognisance of the stability and strong profitability of NB, revenue has remained flat at around N326bn over the last four years. Moreover, earnings margins have been narrowing due to rising input costs amidst the highly competitive operating environment that has prevented the company from passing on the cost to the consumers. With Nigerian consumers remaining under pressure, GCR expects only modest revenue growth in FY21 and FY22, with the margin to remain largely unchanged.
Notwithstanding the above concerns, NB’s strong leverage profile and capital structure is a rating strength. Gross debt increased from N55.7bn in FY19 to N91bn in FY20, but N30bn was retained in cash to bolstered liquidity through the COVID-19 disruption period. Interest coverage remains adequate at 6x at FY20. NB has increasingly made use of short-term facilities, including commercial paper, to manage its working capital and reduce its interest cost. However, GCR views the high proportion of short term debt (80% of the total at FY20) to be a credit risk. Positively, most of the credit facilities are revolving and are all Naira denominated.
The ratings are also supported by the strong operating cash flows coverage of debt, reflecting the robust cash generation. While NB benefits from a highly favourable credit terms from related party suppliers due to the difficulties in accessing foreign currency in Nigeria, with the result being rapid growth in related party payables, GCR expects unwinding and additional short-term fund may be required in the subsequent years. Even after adjusting debt levels to account for a significant unwinding of working capital, NB’s forward looking credit protection metrics remain strong.
NB evidences a firm liquidity profile, with its uses vs. sources liquidity coverage estimated at 1.7x over the next 12 months. This is mainly predicated on N131bn in unutilised facilities which can be rolled over and c. N30bn in cash resources, as well as continued strong cash generation (even after adjusting for a working capital absorption). Key uses of liquidity are expected to be debt redemption and maintenance capex, while the company continues to pay out substantial dividends to its shareholders.
Given the high rating, further uplift is unlikely in the short term. Over the medium term, renewed earnings growth, and greater product or geographic diversification could be supportive of a higher rating. A sustained deterioration in the financial profile could result in a rating downgrade. Specifically, this could derive from greater debt utilisation, or weakness in the overall market. Given the high level of imported inputs, NB is also susceptible to currency devaluation.
|Primary analyst||Biyi Baruwa||Credit Analyst|
|Lagos, Nigeria||Biyi@GCRratings.com||+234 1 904 9462|
|Committee chair||Eyal Shevel||Sector head: Corporates and Public|
|Johannesburg, ZA||Shevel@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Corporate Entities, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Nigeria Country Risk Scores, February 2021|
|GCR Nigeria Corporate Sector Risk Scores, February 2021|
Nigerian Breweries Plc
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Long Term Issuer||Last||National||AA||Watch||August 2020|
|Short Term Issuer||Last||National||A1+|
|Long term Issuer||Last||National||AA||Stable||May 2019|
|Short Term Issuer||Last||National||A1+|
|Long term Issuer||Initial/New||National||AA||Stable||April 2018|
|Short Term Issuer||Initial/New||National||A1+|
RISK SCORE SUMMARY
|Country risk score||3.75|
|Sector risk score||3.00|
|Management and governance||0.00|
|Leverage & capital structure||1.00|
|NB’s Total Risk Score||10.25|
|Credit Rating||See GCR Rating Scales, Symbols and Definitions.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Diversification||Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|Long Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Rating horizon||The rating outlook period, typically 18 to 24 months.|
|Risk Management||The process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Short Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Short Term||Current; ordinarily less than one year.|
SALIENT POINTS OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit ratings have been disclosed to Nigerian Breweries Plc. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
Nigerian Breweries Plc participated in the rating process via tele-conferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Nigerian Breweries Plc and other reliable third parties to accord the credit ratings included:
- 2020 audited annual financial statement, and prior four years annual financial statements;
- Internal and/or external management reports;
- Industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties;
- Information specific to the rated entity and/or industry was also received;