GCR Ratings (“GCR”) has affirmed the national scale long-term and short-term Issuer ratings of A_(NG) and A1_(NG) respectively, assigned to International Breweries Plc, with the Outlook accorded as Stable.

Rating Rationale

The ratings of International Breweries Plc (“IBPLC or “the Company”) balance its strong market position and ongoing parental support, against persistent operating losses and high gearing.

During FY21, IBPLC consolidated on its position as one of the leading local brewers, following the merger with AB InBev in 2017. The higher production capacity has been complemented by product innovations, resulting in deeper market penetration and volume growth. Accordingly, its market share has progressively increased to over 25%. However, given the Company’s current strategy of expanding its footprint in the value segment, it has limited pricing flexibility amid higher input costs. IBPLC’s ability to sustain or further increase the recent gains and diversify its product portfolio towards more margin enhancing products would be positively considered.

GCR takes cognisance of the steady revenue growth over the review period, which peaked at N182.3bn in FY21 (FY20: N136.8bn), driven by higher traded volumes. However, the earnings profile remains constrained by persistent operating losses, due to a combination of the high depreciation charges (related to returnable packaging materials) and imported inflation input cost driven by the continuous devaluation of Naira. Although the high depreciation is an industry-wide norm, IBPLC’s limited pricing flexibility to offset this is negatively viewed. On a positive note, the Company has generated robust operating cash flows over the review period, implying that the net losses have been driven by non-cash fair value adjustments. GCR anticipates that cash flows will be temporarily impacted by high working capital pressures in FY22 due to repayment of outstanding supplier obligations.

The leverage and capital structure remains a negative rating factor. Gross debt increased to N185bn at FY21 (FY20: N112bn) due to an additional working capital loan of N60.2bn from Access Bank. Accordingly, net debt to EBITDA weakened to 3.9x (FY20: 3.7x), but GCR expects this to moderate to the 2.0x – 2.3x range in FY22, on the back of planned debt repayments. Similarly, operating cash flows coverage of debt was impacted by the higher debt, narrowing the coverage to 29.3% in FY21 (FY20: 44.5%) and is expected to reduce further below 20% in FY22 as working capital pressures persist. Conversely, net interest coverage is expected to remain strong in the 15x-20x range, underpinned by earnings growth and planned lower borrowings. GCR has also positively considered the improved debt maturity profile of the Company, following refinancing of the Citi bank facility in 2021.

The liquidity profile is a positive rating factor, underpinned by sources versus uses liquidity coverage estimated at above 2x over a 12-month period to FY22. This is predicated on the substantial undrawn revolving committed facilities from commercial banks, cN60bn in cash holdings and call deposits of N73bn. This will be sufficient to meet the imminent debt redemption of N64bn. No investment commitments or dividend payments are anticipated over the outlook period.

GCR has factored strong group support into the ratings of IBPLC, demonstrated by ongoing operational, technical, and financial support. In this regard, the Company is well integrated into the broader AB InBev group, with key management seconded to it, to support operational improvements. More importantly, AB InBev provided additional funds of N124bn (USD341m) to take up additional shares in the rights issue programme concluded in FY20 and fully guarantees a significant proportion of IB Plc’s existing debt obligation (excluding leases) with its bank lenders.

Outlook Statement

The Stable Outlook reflects GCR’s view that IBPLC will sustain the recent improvement in market share, thus generating sound earnings and cash flows. Gearing metrics are also anticipated to moderate on planned debt repayments.

Rating Triggers

Positive rating action could emanate from IBPLC’s ability to sustain its progression in growing its market share and report firmer earnings margins that translate to net profitability and improvement in operating cash flows. Sustained improvement in key credit protection metrics could also positively impact the ratings.

Conversely, a rating downgrade could result if IBPLC displays a material deterioration in its competitive position, which depresses earnings and cash flows. A renewed increase in debt, and corresponding weakening in the leverage metrics could place downward pressure on the ratings, as would any perceived change in group support.

International Breweries Plc

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 rating has been disclosed to International Breweries Plc. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.

International Breweries Plc participated in the rating process via telephonic management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from International Breweries Plc and other reliable third parties to accord the credit ratings included:

• Five years audited financial statements to 31 December 2021,
• Interim financial statements for the period ended 31 March 2022,
• Internal and/or external management reports,
• Industry comparative data and a breakdown of credit facilities available,
• Information specific to the rated entity and/or industry.