Friday, October 28, 2016/ 11.21am /FBNQuest Research
Event: Nigerian Breweries reports Q3 2016 results
Implications: Likely downward revisions to consensus 2016 PBT forecast
Positives: Net interest expense declined by -23% y/y
Negatives: PBT declined by -66% y/y driven by a gross margin contraction of -639bps y/y and a 9% y/y rise in opex
Nigerian Breweries (NB) Q3 2016 results which were published late yesterday showed that both PBT and PAT fell by -66% y/y and -78% y/y to N2.2bn and N1.0bn respectively, the worst set of profit numbers in recent times. Although the marked decline in profitability was mainly driven by a gross margin contraction of-639bps y/y to 35.8%, a 9% y/y rise in opex also contributed.
The negatives on these lines more than offset the low-single-digit (+3% y/y ) growth in sales. Similar to most consumer goods companies, the prevailing macroeconomic headwinds, including a slowdown in consumer spend, fx illiquidity and a significantly weaker naira continue to impinge on NB’s gross margins.
In Heineken’s (NB’s parent) Q3 trading statement which were published yesterday, management had stated that unit volumes for its Nigerian business segment - of which NB is a significant part – grew by low single digits. Given that NB implemented price increases of around 10%-12% in Q2 2016, we can only infer that the volume mix shifted overwhelmingly in favour of cheap value brands compared with the volume-price mix in Q3 2015.
We note that the slant in consumption towards value brands was the primary factor behind NB’s recent re-definition of the beer market. On a sequential basis, while sales declined by 18% q/q, PBT and PAT fell by much wider margins of 79% q/q and and 88% q/q respectively.
Compared with our forecasts, sales were in line (+0.8%) with our N64.8bn estimate. However, PBT and PAT missed by 66% and 77% respectively due to the negative surprise in gross margin which was around 1,036bps lower than our forecast.
On a 9M basis, the growth trends mirrored those of Q3 2016. While sales were up by 3.6% y/y, both PBT and PAT declined by 26% y/y and 23% y/y respectively. Although a -323bps y/y contraction in gross margin to 43.7% was a key driver behind the y/y reduction in earnings, a 95% y/y spike in interest expense to -N10.2bn also contributed strongly. Compared with our estimates, the 9M 2016 sales were in line (+0.2%).
However, PBT and PAT were 13%-15% lower than our forecasts. Management has proposed an interim dividend of N1.00 per share, which is the same as our forecast; this interim dividend is -17% lower than the N1.20 paid out in 2015. The DPS also implies yield and payout ratios of 0.7% and 39.4% respectively.
When annualised and adjusted for seasonality, NB’s 9M PBT of N27.8bn tracks behind consensus 2016 PBT forecast of N50.6bn. As such, we expect to see downward revisions to consensus 2016 earnings forecast and a sell-off in the shares over the next few days. The shares have outperformed the index ytd, gaining +7.4.% ytd compared with the -5.3% ytd sell-off on the index.
We rate NB Underperform. Our estimates are under review.
Nigerian Breweries Q3 2016 results: actual vs. FBNQuest Research estimates (N millions)
1. Challenging Q3 2016: Even Nigerian Breweries Plc is not Spared