Thursday, February 16, 2017 06:42 PM / ARM Research
Yesterday, Heineken put out its FY 16 numbers which showed organic growth in revenue of 4.8% with proceeds per hectoliter up 2.2%. However, read-through over Africa highlights weak operating performance with specific mention of the adverse impact of naira weakness on results in Nigeria.
Although, growth in volumes sold in Nigeria remained in the mid-single digit range, the parent company highlighted that tough macroeconomic conditions and the resultant increase in consumer downtrading led to the outperformance of mainstream and economy brands over higher margin premium products.
Modest revenue growth on higher value beers:
The Heineken commentary about single digit volume growth in Nigeria and higher revenues is in line with our FY 16E revenue forecasts of
N305.7 billion (+4% YoY). NB hiked beer prices over 2016 with latest increase in November of ~10% and given increased focus on value brands over the period, sales growth should come in modest over Q4 16.
Margin erosion to a multi-year low:
For the FY 16E results, we expect to see significant gross margin compression due to increased share of low-margin beers in the product mix and significant input cost inflation. Furthermore, NB makes greater use of locally sourced inputs (85% of COGS) which surged significantly (local grain prices rose 132% in 2016) as a weaker naira drove increased grain exports to neighbouring countries, putting pressures on domestic supplies. Consequently, we estimate that gross margin should decline 5pps to 43% (9M 16: 43.7%).
We project 2016 EPS at
N3.36 (-30% YoY)—a reading last witnessed in 2008. Using NB’s trend average pay-out ratio, we forecast final DPS at N3.03 (-40% YoY). The share price of NB has declined 20.6% YTD and is currently trading at N117.50, slightly off our FVE of N116.83 with P/E of 28.67x relative to local peer average at 206x.
Elsewhere, following a 65x jump in long term borrowing to ₦35.5 billion, NB drew down on a non-current credit facility of ₦34.5 billion in lieu of refinancing its maturing CP at higher interest rates. Thus, we forecast FY 16E interest expense 70.3% higher YoY at N14 billion (9M 16: 5.1x higher YoY to N10.5 billion).
Cumulative impact of our expectations translates to 2016E PBT and PAT forecasts of N38 billion (-30.1% YoY) and N26 billion (-29.9% YoY) respectively. Thus, we project 2016 EPS at N3.36 (-30% YoY)—a reading last witnessed in 2008. Using NB’s trend average pay-out ratio, we forecast final DPS at N3.03 (-40% YoY)1. The share price of NB has declined 20.6% YTD and is currently trading at N117.50, slightly off our FVE of N116.83 with P/E of 28.67x relative to local peer average at 206x.