February 21, 2018/ 02.18 PM/ FBNQuest Research
Cuts to our 2018-19E EPS forecasts and price target
Nigerian Breweries’ (NB) Q4 2017 results came in well behind our forecasts mainly due to negative surprises in sales and gross margin. The negative surprise in sales was largely reflective of a mid-single digit y/y decline in unit volumes, following price increases implemented by the company in Q4 2017.
Management noted that these price increases resulted in some market share loss (mainly because competition did not follow immediately). Furthermore, inflationary cost increases on raw materials also contributed to the y/y contraction in gross margin.
Following the results, we have cut our EPS forecasts by around -27% on average over the 2018-19E period. Our new price target of N109.7 is 17% lower. In terms of outlook, although we see some of the macroeconomic pressures (such as fx liquidity) abating, the operating environment remains challenging due to an increasingly competitive landscape.
As such, we see 2018E sales and PBT growth coming in at around 5% y/y. On a relative basis, the shares are trading on a 2018E P/E multiple of 30.9x for 36% EPS growth in 2019E. These compare with the 30.0x 2018E (end-June) multiple for 58% EPS growth that rival Guinness Nigeria is trading on. Although the shares have shed -7% ytd (vs. +10% return on the NSE ASI), our price target implies a potential downside of -14.3% from current levels. Consequently, we retain our Underperform recommendation on the stock.
Q4 PBT up 3% y/y; surprised negatively
NB’s Q4 2017 results showed that PAT grew by 9% y/y to N9.0bn despite a marginal (-1% y/y) decline in sales. The single-digit earnings growth was mainly driven by a -15% reduction in net interest expense.
However, a lower effective tax rate of 25.9% (vs. 30.1% in Q4 2016) also contributed. Although gross margin fell by -87bps y/y to 41% and other income declined by 12% y/y, the reduction in net interest expense completely offset these negatives and was the major factor behind the PBT growth of 3% y/y.
On a sequential basis sales grew by 22% y/y. However, thanks to base effects in the prior quarter, PBT and PAT advanced by around 33x q/q and 35x q/q respectively. Compared with our forecasts, sales, PBT and PAT missed by 10%, 23% and 19% respectively. NB’s PBT also came in significantly below consensus 2017 PBT forecast of N52bn.