Thursday, October 27, 2016 04:27 PM / Cordros Capital
Yesterday, NB released results for nine months and third quarter ended September 2016. The key features of the third quarter result are:
(1) a record y/y and q/q gross margin contraction;
(2) record low EBITDA and EBIT margins;
(3) opex savings;
(4) notable y/y and q/q reduction in finance charges; and
(5) record declines in PBT (65.8% y/y and 78.7% q/q) and PAT (77.8% y/y and 87.9% q/q).
Over the nine months of 2016, NB's revenue was up 3.6% while PBT and PAT were down 26% and 23.2% respectively. The Board proposed an interim dividend of N1.00 per share (vs. N1.20 per share in 9M-2015).
The third quarter is typically a slow period for NB in terms of sales, hence the strong (18.1%) q/q revenue decline.
Compared to Q3-15 however, revenue increased by 3.3%, supported by
(1) volume growth (in low single digit, according to HEINEKEN, NB's parent company) and
(2) higher comparative prices following the PI action taken in September.
Trading conditions remain difficult, with consumers preferring mainly low margin value brands (GOLDBERG and LIFE) amid a weaker macroeconomic environment. Difficult trading conditions are likely to persist for the rest of the year, but high beer consumption associated with year-end festivities should provide some respite.
Gross margin contracted by over 1000bps y/y and q/q, broadly reflecting increased production costs (raw materials and consumables cost increased 21.4% y/y) and deteriorating brand mix. Suffice to say that margins may have been worse, save for the price action taken in September. The negative pass through impact of continued currency weakness on margins points to the likelihood of another PI before December.
In line with a common trend among FMCGs, NB's opex fell 11.9% y/y and 6.6% q/q. The y/y opex decline can be traced to lower administrative expenses while reduced marketing and distribution expenses drove the q/q decline.
Finance charges fell 20% y/y and 67% q/q. It would seem that the reversal (or reclassification) of the forex related loss of N7 billion reported in the first half of this year contributed the savings on the finance charges line. Interest expenses, on the other hand, rose from less than N1 billion each in both the first and second quarters to N8.9 billion during the period under review.
Overall, NB's third quarter result depicts continued difficult trading conditions as Nigeria's macroeconomic environment further deteriorates. All FMCGs third quarter results released thus far are not any different. With October almost ending and consumer sentiment still weak, the possibility that performances will improve in the final quarter of the year is slim.
Investors have reacted negatively to most third quarter results (across different sectors) that have been released recently. While acknowledging NB's strong long term fundamentals, the latest result is likely to induce temporary selloffs in the company's shares.
Cordros Capital’s valuations are under review.
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