Tuesday, November 1, 2016 9:58 AM / FBNQuest Research
Event: International Breweries reports Q2 2017 (end-Sep) results
Implications: Downward revision to consensus estimates expected
Positives: Sales of N6.6bn were up 35% y/y and 12% ahead of our estimates
Negatives: Pre-tax and post-tax losses of –N216m
Late yesterday, the NSE published International Breweries’ Q2 2017 (end-Sep) results which showed that sales of N6.6bn were up 35% y/y. However, the company reported a pre-tax loss of –N216m which was primarily driven by a 372% y/y increase in net finance costs and, to a lesser extent, 6% y/y and 304% y/y increases in operating expense and other losses respectively.
Gross margin was flat y/y during the quarter. The company reported zero tax and a post-tax loss of –N216m. The pre-tax and post-tax losses compare with PBT and PAT of N381m and N284m respectively recorded in Q2 2016. Included in the net finance charge was an fx translation loss of –N1.3bn. (The company has a US$25m loan on its books which is repayable in February 2017). Stripping out this loss, PBT advanced by 172% y/y. This point is seen in the operating profit, which grew by 91% y/y.
Sequentially, sales were down -4% q/q which we attribute to seasonality - the end-Sep quarter is one the brewers’ weaker quarters. The pre-tax and post-tax losses compare with pre-tax and post-tax losses of –N1.3bn and –N1.7bn respectively recorded in Q1 2017.
On a half year basis, sales were up 33% y/y while the pre-tax loss of –N1.4bn compares with PBT of N1.0bn reported in H1 2016. The H1 pre-tax loss was due to a 672% y/y increase in net finance charges and, to a lesser extent, a 7% increase in operating expenses.
Compared with our estimates, Q2 sales were ahead by 12% while PBT and PAT were ahead by 9%. We had forecast a 20% y/y growth in sales due to persistent downtrading by consumers to cheaper brands – the segment International Breweries operates in.
Also, the company is expanding its reach to Lagos state (its core region is the South-West region (ex-Lagos state)) and our ground checks showed that its core brand, Trophy, is gaining traction in the state. The Q3 performance implies that the company may be doing better than we expected on these fronts.
Despite the unfavorable macroeconomic environment and fx challenges, Q2 gross margins were flattish y/y and ahead of our estimate by 443bps. Our weaker gross margin forecast attempted to capture the fact that the company imports a significant amount of its raw materials.
We highlight that the CBN implemented a floating exchange rate regime which saw the interbank rate moving downwards by a further 10% over the June to September period, after an initial 30% as of end-June. We shift our focus to the quarterly trend which saw a contraction of -318bps q/q to drive home this point. Nonetheless, we seek management’s guidance on the sustainability of the current gross margin level
Year-to-date, International Breweries shares have gained +25% and have significantly outperformed the broad index which has shed -5%. We expect a sell-off in the shares on the back of these numbers (especially the negative impact of the foreign currency exposure). Having said that, the fundamentals look healthy; as such, we expect to see some recovery in the shares once the market gets over the fx-related negatives in the results.
We rate the stock Underperform. Our estimates are under review.
International Breweries’ Q2 2017 (end-Sep) results vs. FBNQuest estimates