Vanguard reports that investors may be bracing up for another scorch-earth returns terrain in equities as companies begin to sound another round of profit warnings for full year 2016 results more of which are expected to be coming out from this week. UAC Property Development Company Plc, UPDC, fired the first salvo last Thursday when it announced it was expecting to report “materially lower earnings” in 2016 due to losses incurred in certain projects and “impairments of investment” in one of their “joint venture projects”.
A profit warning in layman’s parlance refers to when companies inform investors that they are expecting to report poor earnings. Poor earnings could be a profit that is significantly lower than the year before or at worst an outright loss. Though the purpose is usually to prepare the minds of the investors to accept their fate and mitigate speculations, evidences show that investors are hardly protected from ensuing losses.
Sometimes the losses could be double fold as the stock price drops immediately following the announcement and may also drop further when the results are eventually released, depending on how bad things really turned out. In the present case of UPDC it appeared investors were expecting better results, hence speculative positioning which had ensured steady appreciation of the share price up until Thursday’s profit warning. Consequently the jolted investors began a backslide into price depreciation of the stock.
The downward trend is expected to persist this week, bringing more losses to the investors. In a statement to the Nigerian Stock Exchange, NSE, signed by the Company Secretary, Devel Godwm Samuel, UPDC blamed rising financial cost, foreign exchange losses and negative performance of the hotel asset as the reason for the expected poor result. The company owns the Golden Tulip hotel in Festac, Lagos, likely the source of its latest headache. In the letter to NSE the company stated: “We have carried out a preliminary review, subject to audit, of the Management Accounts of our company for the year ended 31st December, 2016 and expect to report materially lower earnings. “This is mainly as a result of the recognition of losses on certain projects and impairment of investments in one joint venture project occasioned by significant increase in finance costs.
“The results were further worsened by foreign exchange losses and the negative performance of our hotel asset. “Further details of the financial performance will be disclosed in the audited financial statements. “Despite the continued lull in the real estate sector occasioned by the headwinds of the macro-economic environment, the fundamentals of the business remain strong and we are restructuring and repositioning the company to better deal with the challenges of the times and explore emerging opportunities.” UPDC had reported a pre-tax profit of N132 million in the first 9 months of 2016. It reported a loss of N110 million in the corresponding period in 2015. Nigeria Breweries also warns: On the heels of the UPDC announcement came a hint of continued tough time in Nigerian Breweries Plc, NB, when one of its top executives disclosed the year 2017 would be as challenging as 2016.
Noting that the Brewing giant raised beer prices three times last year to cushion the effect of rising cost, the company’s sales director, Mr Herbert Eze, hinted that this year would still be tough.
Company’s trade partners
While speaking at the company’s trade partners’ awards, held in Lagos, over the weekend, Eze stated: “No doubt, 2016 was bad for business, the main reason why we had to reluctantly adjust our prices three times that year. And if not for your resilience, perhaps it would have been worse. “Let me tell you, 2017 is going to be tough too, and I cannot even say which one will be tougher between last year and 2017; hence my charge to you to be more resilient and hardworking,” he added.
Analysts believe this is a subtle message to shareholders and investors. Nigeria Breweries share price has gained about 23% in the last one year. It’s current share price of N113 is 28 times its 2015 profits.
NB leverages on value brands to lift turnover: Analysts at Cardinal Stone Partners Limited, a Lagos based investment house, are of the opinion that high inflation and weak aggregate demand will continue to be a threat to NB’s revenue, especially premium and mainstream beers in 2017. But they stated: “However, given its robust portfolio of value brands, we expect the company to remain resilient.
Despite rising competition from International Breweries in the ‘value-beer’ segment, we believe NB will hold out well given its strong marketing.”
Moreover, NB’s strategy to increase the percentage of locally sourced inputs to 60% by 2018 (currently at 47.4%) is expected to help boost profitability margins in the medium term considering the negative impact of the depreciated currency on imported inputs and production costs. On this count Cardinal Stone analysts stated: “We estimate a modest 2.1% year-on-year, YoY, growth in revenue to N311.7 billion for FY’17.”
Earnings outlook: The analysts added: “With the recent stability in official rate, we expect NB to take some respite from foreign exchange losses at least in first quarter 2017. However, with 25.2% of NB’s payables in foreign currency (as at FY’15), the risk of FX related earnings decline is still inherent. “Nevertheless, we expect earnings recovery in FY’17 and forecast a 36.2% YoY growth in Earnings Per Share to N4.27. “We have retained our HOLD rating on NB with our one year price target of N150.34 which implies a potential upside of 5.9% from its current price.”