July 05, 2019 /10:02AM / By FBNQuest Research / Header Image
Material cuts to earnings forecasts
With Q1 2019 results now providing a basis for y/y comparisons for the first time post-merger, unit volume growth is clearly the primary driver behind International Breweries’ (IB) strong topline. Indeed, Q1 sales growth (+35% y/y) was much faster than those of NB (+40bps y/y) and Guinness (-4% y/y) over the same period. In our view, this confirms that IB is aggressively taking market share from competition.
We however highlight that increased volumes coming from the Sagamu plant launched in Q3 last year contributed meaningfully to the y/y sales growth. Accordingly, we expect this growth to normalise to lower levels from Q3 2019. Further down the P&L, IB reported the worst pretax loss of –N5.3bn since its merger, missing our Q1 forecast of –N2.1bn. This loss was largely caused by a higher interest charge and a ramp up in marketing spend, both of which tightened the squeeze in earnings. Given these results, we have adjusted our 2019-20E sales forecasts upwards. We have however increased our opex and interest expense forecasts over the same period.
The net effect of these changes is a -27% average EPS cut over the 2019-20E period, and a -28% downward revision to our price target. Year to date, IB shares have lost –44%, underperforming the broad market by -38%. Our new price target of N20.3 implies an upside potential of +19%. That said, given that concrete steps are currently not being taken by IB to deleverage, we forecast that the company will continue to deliver pretax losses over our forecast period. We therefore expect the market to overcompensate for these losses, leaving IB’s shares in oversold territory for an extended period. As such, we retain our Underperform rating despite the upside.
Pretax loss much worse than expected
IB made a pretax loss of –N5.3bn in Q1 2019. This was more than double the Q1 2018 loss of -N2.6bn. The y/y weaker earnings were driven by a 41% y/y increase in net interest charge and a 58% y/y increase in opex. Sales grew 35% y/y while gross margin expanded by 25bps, but these were not strong enough to offset the y/y increases in opex and interest charge.
Sequentially, sales fell by 6% q/q, while the Q1 2019 pretax loss compares with the N1.1bn PBT in the previous quarter. Relative to our forecasts, sales beat by 11% but the pretax loss was worse than our Q1 forecast of –N2.1bn, driven by negative surprises in opex (+28%) and net interest charge (+44%).