Upgraded '21f outlook on Q1 '21 results and balance sheet deleveraging
Following Intbrew's mixed Q1 '21 results, we have adjusted our loss per share (LPS) forecasts for Intbrew over '21-22f by 26% to an average of -NGN0.38 (from -NGN0.51 previously). However, our new price target of NGN7.5 is up by only 9% because we have raised our risk-free rate to 12.5% and adjusted our beta assumption to 0.8 (from 0.6). While we are impressed with the company's strengthening fundamentals, we think challenges persist, and hence retain our Underperform rating. On the positive side, we have raised our turnover estimate for FY '21f to NGN146.1bn (from NGN137.7bn previously).
In our view, this is quite conservative as annualised Q1 '21 sales came in around NGN155.9bn. Intbrew raised prices between 5-7% in March '21f, after increasing prices twice in 2020. We believe prices need to be increased by as much as 20% to 25% to affect a significant expansion in margins for Intbrew and a return to profitability. For volumes, we estimate an increase by mid-single digits y/y, with Budweiser under stiffer competition from Heineken, while Trophy and Hero continue to enjoy solid cross-regional demand. Notably, Intbrew introduced a stout brand in 2020, called Trophy Stout. According to management, the brand has enjoyed impressive demand despite marketing constraints. On the negative side, we expect gross margin to contract to 21.5% (-78bps y/y), due to cost pressures.
Notably, gross margin in 2020 rose to 22.3% (+323bps y/y) after successive years of contraction since 2017. Also, we estimate opex higher at NGN42.4bn (+12.7% vs prior estimate of NGN37.6bn), due to expected increase in marketing expense, which was muted in 2020. Back to the positives, we note the decline in interest expense from a high of NGN16.0bn to NGN3.2bn in FY '20, after Intbrew used the NGN165bn right issue proceeds to repay debts. We are projecting finance cost at NGN1.0bn for '21f, on an assumption that management will not refinance maturing debt (USD278m in May '21f). Cash, on the other hand, remains robust.
These adjustments imply a loss after tax of -NGN10.9bn (from -NGN12.4bn in '20 and prior estimate of -NGN13.9bn). Intbrew trades at a '21f EV/EBITDA of 6.4x, which compares with EM & global brewer peers of 16.4x and 21.9x respectively. Year-to-date, Intbrew shares have shed -12.2% vs. the ASI's -2.1%..
Intbrew results in Q1 '21 was mixed; USD278mn of debt to mature in May '21
In Q1 '21, topline growth was stable, but the company remained in a loss position. Sales of NGN39bn was ahead of ours and consensus expectations, while after tax losses worsened to NGN2.6bn (from NGN1.5bn in Q4'20). In Q2 '21, we expect USD278m of debt financing (obtained in 2018) to mature in May '21. Without refinancing, Intbrew's balance sheet will be de-levered. Over the coming quarters, we expect Intbrew's management to focus on curtailing costs and growing revenues aggressively.