Sunday May 23, 2021 / 7:00 a.m. / by GCR Ratings / Header image credit: International Breweries Plc

GCR Ratings (“GCR”) has assigned long-term and short-term country-wide ratings to issuers A(NG) and A1(NG), respectively, to International Breweries Plc, with the outlook considered stable.

The ratings of International Breweries Plc (“IBPLC” or “the Company”) are underpinned by its medium to strong competitive position within the Nigerian brewing industry and the continued operational and strategic support of its parent company, Anheuser- Bush InBev SA / NV (“AB InBev”), the world’s largest brewery with operations in over 150 countries. This is however offset by persistent operating losses and weak credit protection measures.

IBPLC became the second largest brewer in Nigeria following the merger of the three Nigerian subsidiaries of AB InBev (IBPLC, Intafact Breweries Limited and Pabod Breweries Limited). Since FY18, the company has spent around 145 billion naira, expanding its brewing capacity to 9 million hectolitre per year at four brewing plants. IBPLC has a well-diversified beer portfolio, comprising some top local brands in the premium, mid and value segments. Beer diversification is limited and IBPLC’s income is almost entirely generated in Nigeria – this is not expected to change.

Although IBPLC has experienced steady revenue growth since integration, earnings resilience has been weak with continued operating losses. Pressure on margins was fueled by the depreciation of the naira, which raised the prices of imported raw materials and other capital and operating expenses. Depreciation also remains high for returnable packaging materials. Growth in volumes and improved efficiency are expected to contribute to higher margins going forward, but GCR expects profitability to remain low in the near term due to high fixed costs and currency risks. .

The company’s low debt profile is also a negative rating factor. Gross debt rose from 8.5 billion naira in FY16 to a peak of 264.9 billion Naira in FY19, mainly due to additional loans obtained to finance expansion after the merger. The shareholder-backed right issue raised 164 billion naira in FY20, with the proceeds being used to reduce the debt burden to 112.4 billion naira. This, combined with higher EBITDA, saw net debt on EBITDA fall to 3.7 times more sustainable in FY20, from a high of 19x reported at FY19, although still somewhat high. In addition, the decrease in debt also resulted in a significant improvement in other credit protection measures with net interest coverage increasing to 12.8x in FY20 (FY19: 0.9x) and cash flow coverage. Debt operating cash flow registering at 44.5% (FY19: 10.2%) huge release of working capital. GCR expects Net Debt to EBITDA to record around 3x – 3.5x by FY21 due to the expected slight improvement in EBITDA, with interest coverage improving also due to lower debt. However, some pressure on cash flow hedging may arise once IBPLC begins to liquidate its intergroup commercial creditors.

GCR has taken a negative view of the short-term nature of almost all of the debt, which is largely denominated in USD, resulting in substantial currency exposure, as well as concentration on a single funding counterparty. IBPLC’s plans to access short-term financial markets should support improved funding flexibility.

IBPLC exhibits a good liquidity profile, with its sources versus uses, liquidity coverage estimated to be over 1.9x over a 12 month period up to FY21. This relies on significant pledged facilities from other recently pledged commercial banks, which are revolving in nature, and N33.5 billion in cash. Notwithstanding the high short-term debt, this adequately covers the debt refinancing needs. In addition, IBPLC is also reducing its capital expenditure, which will allow the internal cash generated to be used for working capital. GCR therefore expects liquidity coverage to remain around 2x by FY21.

GCR factored in the group’s strong support in IBPLC ratings, demonstrated by continued operational, technical and financial support. In this regard, IBPLC is well integrated with AB InBev as a whole, with key management seconded to it to support operational improvements. More importantly, AB InBev recently spent 90 billion naira ($ 250 million) directly on capacity expansion, invested 124 billion naira ($ 341 million) to regain its rights in fiscal year 20 and continues to fully guarantee all of IBPLC’s existing debts (excluding leases) with its bank lenders.

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The stable outlook reflects GCR’s view that IBPC will continue to benefit from tangible technical and financial support from AB InBev until there is a significant improvement in operational performance, earnings and business metrics. credit protection. In this regard, GCR expects a gradual improvement on the back of profit performance, as additional volumes are produced and efficiency improvements take hold.

Sustained revenue growth and firmer margins which translate into profitability and improved operating cash flow. A positive rating action could also result from a favorable restructuring of the debt profile, as well as an improvement in debt metrics based on earnings below 200%.

Conversely, a rating downgrade could occur if IBPLC is unable to sustainably improve its operations, so that the Company continues to report operating losses. A further increase in debt and a corresponding weakening of credit protection measures would be viewed negatively. GCR would also view negatively any perceived change in shareholder support.

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