International Breweries Q4 2019 Results Review: Underperform Rating Maintained

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Tuesday, April 28, 2020 / 12:38 PM / by FBNQuest Research / Header Image Credit: Anyflip


Deep cuts to TP and earnings forecasts

We have cut our price target for International Breweries (IB) by -39% to N4.7 on the back of i) marked downward adjustments to earnings forecasts and ii) an increase in our equity risk premium assumption by 150bps to 7.5%. Regarding the first point, earnings continue to deteriorate since the merger in 2017. The company's record pretax loss of -N36.2 for 2019 was 4.5x higher y/y and 15% worse than our forecast of -N31.6bn. We also highlight the gross loss of -N5.9bn in Q4 versus our forecast of N11.9bn.


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Over the coming quarters, we do not see any sign of earnings improvement. Although, management has unofficially communicated that the N165bn rights issue undertaken to deleverage its balance sheet was fully subscribed, we do not expect lower interest charges to be strong enough to lift earnings out of negative territory over our forecast period. We have modelled a reduction of our 2020-22E net interest expense forecasts by an average of -27% post-rights but forecast an increase in the 2020-22E pretax loss by an average of 39%.

 

We particularly see earnings being weighed down by competitive headwinds, a weaker exchange rate and sluggish demand in the near term on account of the COVID-19 outbreak.


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Year-to-date, IB shares have lost -50%, underperforming the broad market by -38%. Our new price target implies a downside potential of -3%. We retain our Underperform rating on the stock.

 

Q4 loss 23x higher y/y

IB's pretax loss for Q4 2019 was caused by a -2,728bp squeeze in gross margin to 17%. Net interest expense fell significantly by -71% y/y to -N2.0bn, but this positive was eroded by the gross margin contraction.

 

Sequentially, gross margin contracted by -4,455bps q/q whereas net interest expense declined by 67% q/q. Q4 pretax loss declined by -11% q/q.

 

Relative to our forecasts, gross margin was -4,886bps narrower than forecast whereas net interest expense beat our forecasts by 62%. The pretax loss in Q4 was 62% higher than our forecast of -N7.5bn.

 

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