Heineken in Africa: Rwanda and Nigeria come under the microscope (Updated)

Dear Africa interested individuals:
                                                        This is the third multinational I will take a look at its operations in Africa.  I will start off with similarities between the performance of both companies: Nigerian Breweries (NB) and Bralirwa Rwanda.  

  1. Both subsidiaries experienced a decline in performance and a difficult year relative to FY 2013 with Bralirwa coming out worse off.    
  2. Both subsidiaries have negative operational working capital (they do not have any funds available at all for working capital for operational purposes.)  Nigerian Breweries is -$287m and Bralirwa is -$4.14m.  
  3. Both subsidiaries piled on debt from FY 2013 - 2014.  
  4. Both subsidiaries achieved a return on assets of 14.6% on average over two fiscal years.  
  5. Both subsidiaries paid actual interest less than the required amount as stated on their income statements.  Bralirwa paid 46% and NB 59% of the actual total amount expected.  I deem this a dishonest act that further reflects the paucity of cash at both subsidiaries. 
  6. Both subsidiaries increased their debt significantly from FY 2013 -2014;  Bralirwa by 70% and NB by 174%.  
  7. Both subsidiaries have Nigerians as Chairman of their respective boards.  
  8. Both subsidiaries recorded a decline in pre-tax income from FY 2013 - 2014: NB -1.25% and Bralirwa by -12%.   
  9. Both subsidaries have liquidity issues; their quick ratios are lower than that of Unilever Nigeria and that says a lot.  
  10. Both subsidaries have a cash problem (different from cash flow.)
The key differences between both subsidiaries are as follows:

  • NB is finding it more difficult to generate sales as at FY 2014 end.  
  • Bralirwa is more profitable than NB while being a lot smaller than NB.  
  • NB does not require any working capital to generate sales while Bralirwa does; NB's suppliers are funding its operations through provision of supplies way in advance of payment.  
  • Bralirwa has done better in growing revenue over the past five years in comparison to NB at 10.7% relative to NB's 9.4%.  
  • NB has grown operating profit over the past five years at 10.4%, ahead of Bralirwa at 7.6%.  
  • Bralirwa has more of an operational costs problem than NB.  From FY 2013 - 2014, Bralirwa's revenue rose by 1% and and pre-tax income declined by 12%.  NB's revenue declined 2% and pre-tax income declined 1.25%.  To further buttress my point, cost of goods sold over the past five years rose 7.3% for NB and 16.5% for Bralirwa.  
  • NB has a lot more demand for its products compared to Bralirwa.  It turns over its product portfolio in less than half the time it will take Bralirwa and consequently puts its P,P&E to better use than Bralirwa.  
  • The employees of NB on average work harder for the company than the employees of Bralirwa; the difference is 31%.  NB employees work 31% harder than Bralirwa employees.  
  • 26% of the revenue of Bralirwa in 2014 came from soft drinks.  
  • Bralirwa does not have any free cash flow while NB does over the past two fiscal years.  
  • NB is mortgaging more of its future to generate sales today.  Trade debtors increased by $16.3m while sales decreased by $11.2m.  Bralirwa on the other hand, sales rose by $1.07m and trade debtors declined by $1.52m.  The same trend continued for NB as at H1 2015.  This will likely cause NB's debt profile to continue to rise.  To further buttress my point, debt rose by $61m over the first six months of 2015.  
  • Bralirwa finds it a lot less expensive to distribute and market its products relative to NB.  It cost Bralirwa a third less than NB to distribute and market its prducts relative to sales generated.  
  • Dividend cover is 1.2X for NB and 1.7X for Bralirwa.  NB borrowed the equivalent of $80m during FY 2014 and still decided to spend about $190m on dividend payment for the same fiscal period! NB could have halved its dividend and avoided incurring more debt. A classical case of managing shareholders over managing the business.  
  • Bralirwa is more debt burdened than NB; debt/equity is 31.5% and NB is 11% on average over the past two fiscal years.  
  • Bralirwa has invested too much in inventory and needs to stop if it wants to progress consistently going forward.  Bralirwa has either overestimated demand or is just overly optimistic about the near future.
  • Cash at the bank could barely cover its net finance costs for both subsidiaries.  
  • Bralirwa appears more determined to reduce its debt than NB who is surviving operationally on debt to banks and its suppliers.  When the tables turn, the shock to the income statement of NB will be sudden. 
  • Bralirwa booked interest income on its books that was 1,154 times higher than the actual interest income paid to it. This is an unjustified and unwarranted boost to income. Heineken subsidiaries in Africa apparently like to play to the gallery; let us call it the optics show.
 In summary, the company that is more susceptible to a shock is NB; the company that a shock will reveal itself quicker on its books is Bralirwa.  The company that is not over extending itself in its quest to remain competitive is Bralirwa.  Despite smaller demand on average for Bralirwa, it is still more profitable than NB despite having a higher cost of revenue.  The last time I checked, the line that matters most is the bottom-line.  The markets appear to agree with me.  As at July 28th, 2015, Bralirwa has a trailing PER of 25.9X while NB has a trailing PER of 21.9X. 
                                Tell others to tell others about this Blog; a new dawn is here.  

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