Event: International Breweries reports Q3 2017 (end-Dec) results
Implications: Upward revisions to consensus 2017 PBT forecast expected
Positives: Sales, PBT and PAT grew 46% y/y, 44% y/y and 43% y/y respectively
Negatives: Operating expenses grew 30% y/y; 14% ahead of our estimates
This morning, the NSE published International Breweries’ Q3 2017 (end-Dec) results which surprised positively. While sales of N9.2bn grew by 46% y/y, PBT and PAT advanced by 44% y/y and 43% y/y to N2.0bn and N1.4bn respectively. The company reported a -634bp y/y gross margin contraction to 48% and a 30% y/y increase in operating expenses.
However, these were not strong enough to offset the strong y/y sales growth and a -27% y/y decline in net finance charges, and led to the strong bottom line. On a sequential basis, sales grew by 40% q/q which we attribute to seasonality. The end-Dec quarter is usually one of the strongest quarters for the brewers.
The PBT and PAT compare with the pre-tax and post-tax loss of –N216m reported in Q2 2017 (end-Sept). Despite a 15% q/q rise in operating expenses, the strong q/q bottom line was driven by an -85% q/q decline in net interest expense and a 112bp q/q expansion in gross margin.
The macroeconomic challenges that were apparent since 2014 have been further compounded by issues surrounding fx liquidity. The squeeze on household wallets has led consumers to down-trade further to much cheaper brands. As such, the likes of International Breweries – which operates solely in the value segment – has been favoured. On the back of this new market shift to the value segment, we had expected to see top line growth in the teens range for Q3 2017. Notwithstanding, the company surprised positively.
On a 9-month basis, sales grew by 38% y/y to N22.7bn. PBT of N521m was down -78% y/y while post tax loss of –N437m compares with PAT of N1.7bn reported in 9M 2016.
Compared with our estimates, Q3 sales were ahead by 29% while PBT and PAT were significantly ahead.
The reason for the variance was the positive surprise on the gross margin and net finance cost lines. Owing to the continued deterioration of the currency and the company’s exposure to foreign currency denominated loans (US$25m), we expected to see elevated finance charges. We would be looking for clarification on the positive surprise here.
Given the stronger-than-expected set of numbers, we expect to see cautious upward revisions to consensus FY 2017 (end-Jun) estimates, and expect that the market will react positively to these numbers.
Year to date, International Breweries shares have shed -5.8% and have underperformed the broad index which is down -2.4% this year.
We rate International Breweries shares Underperform. Our estimates are under review.
International Breweries Q3 2017 (end-Dec) results: actual vs. FBNQuest Research estimates (N millions)