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NB Reports Q1 2017 Results as Gross Margin Shrunk to 44.4%

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Friday, April 21, 2017 11:15 AM /FBNQuest Research

Event: Nigerian Breweries reports Q1 2017 results
Implications
: Upward revisions to consensus 2017 PBT forecast expected
Positives
: Sales and PBT grew by 18% y/y and 16% y/y respectively
Negatives
: Limited; gross margin shrunk by -364bps y/y to 44.4%


Late yesterday Nigerian Breweries (NB) published its Q1 2017 results which showed PBT grew by 16% y/y to N17.4bn. The key drivers behind the solid PBT growth were sales growth of 18% y/y to N91.3bn and a -41% y/y decline in net interest expense. These two positives completely offset a gross margin contraction of -364bps y/y to 44.4% and an 11% y/y spike in opex.

Further down the P&L, an increase in the effective tax rate to 34.3% compared with 30.3% in Q1 2016 resulted in PAT growth narrowing to 10% y/y. Sequentially, sales were flat q/q. However,  PBT and PAT grew by 47% q/q and 38% q/q respectively due to a combination of factors including a gross margin expansion of 255bps q/q, a 43% q/q reduction in interest expense and an 8% q/q decrease in opex. Compared with our forecasts, sales beat by 8%. 

However, PBT and PAT beat by much wider margins of 30% and 22% respectively largely because of positive surprises in gross margins and net interest expense. On an annualised basis, although NB’s Q1 sales track ahead of consensus estimate by 9%, PBT and PAT are ahead by wider margins of 44% and 35% respectively.

Although we believe that the double-digit y/y growth on the topline was driven by a combination of higher pricing and volume growth, given average price increases of around 12% implemented by NB in 2016, we believe that the pricing impact was more pronounced.


We estimate that unit volumes grew by mid-to-high single-digit, driven by strong performance of the economy brands, such as Life and Goldberg. Pending management comments, we continue to believe that the volume performance of national premium brands (previously mainstream) such as “Star” continues to be pressured by the visible squeeze on household wallets.

Given that up to 60% of NB’s inputs are imported, we attribute the marked expansion in gross margin (+255bps q/q) to improved fx liquidity during the quarter following a significant step-up in the CBN’s fx intervention. The CBN’s intervention also led to a sharp appreciation of the naira on the parallel market in Q1.
     
We expect to see upward revisions to Consensus 2017 PBT forecast. NB shares have underperformed the index ytd. They have shed -16.2% ytd vs. the -5.9% return on the index.

We rate NB Underperform. Our estimates are under review.


Nigerian Breweries Q1 2017 results: actual vs. FBNQuest Research estimates (N millions)

Q1 2017

 

Actual

Y/y

Q/q

FBNQuest est.

Act. vs FBNQuest est (%)

Sales

91,289

17.7%

0.3%

84,535

8.0%

Cost of sales

-50,724

26.0%

-4.1%

-47,762

6.2%

Gross profit

40,564

8.8%

6.4%

36,773

10.3%

-Gross margin

44.4%

-364bps

255bps

43.5%

94bps

Dist. and admin. exp

-21,566

11.0%

-7.8%

-21,134

2.0%

Operating profit

18,998

6.4%

29.0%

15,639

21.5%

Other income

203

41.6%

-5%

144

41.6%

Net interest expense

-1,762

-41.0%

-42.5%

-2,365

-25.5%

PBT

17,439

16.2%

46.8%

13,417

30.0%

-PBT margin

19.1%

-25bps

605bps

15.9%

323bps

Tax

-5,990

31.6%

67.6%

-4,025

48.8%

-Tax rate

34.3%

401bps

427bps

30.0%

435bps

PAT

11,449

9.5%

37.9%

9,392

21.9%

- PAT margin

12.5%

-94bps

342bps

11.1%

143bps

 

Source: NSE; FBNQuest Estimates

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