April 29, 2019 / 06:39PM / By Meristem Research
Net Revenue Stays Flattish
Nigerian Breweries Plc. (NB) reported a growth of 3.33% and 0.38% in gross and net revenues. Net revenue settled at NGN83.28bn in Q1:2019 (vs. NGN82.97bn in Q1:2018), weakened by the increase in excise duties, which accounted for 16.82% of the cost of sales for the quarter (vs. 12.19% in Q1:2018). For the rest of the year, we expect excise charges to continue to put pressure on the company’s topline; partly due to further increase in excise duty from NGN30.00 to NGN35.00 per litre by H1:2019, and the likelihood of passing this cost to consumers is slim due to the stiff rivalry in the sector. On this premise, we project a decline in FY2019 revenue by 2.44% to NGN316.47bn.
Cost to Sales Trends Higher, Pressures Gross Margin
Cost of sales increased by 7.29% to NGN48.22bn, settling cost to sales at 57.91% (above 5-year average of 53.64% in corresponding periods), mirroring the uptrend observed as at FY2018 (60.88%). Increases in the cost of raw materials and consumables (+8.83%) were the major drags, as NB currently sources c.50% of raw materials locally, compared to its peers (GUINNESS: 75%; INTBREW: 70%), and hopes to attain 60% by 2020. Consequently, gross profit margin settled lower at 42.09% (vs. 45.82% in Q1:2019).
Increased Operating Costs Contracts Margins Further
NB's operating expenses increased by 2.83% on the back of a 7.82% rise in marketing and distribution expenses, which is expected given the heightened competition among the brewers. Hence, EBIT declined by 20.32% to NGN13.90bn (vs. NGN17.45bn in Q1:2018) with operating margin settling lower at 16.69% (vs. 21.03% in Q1:2018). The rise in finance cost (+6.36%) worsened profit performance as Profit Before Tax declined by 24.86% to NGN11.46bn while Profit after Tax also dropped by 21.35% to NGN8.03bn (vs. NGN10.20bn in Q1:2018). Return on Equity for the period under review pegged at 10.07%, the lowest it has been in any quarter in the last decade, dragged mainly by dwindling net margin of 9.64% Q1:2019 (vs. 12.30% Q1:2018) and lower asset turnover. Given the pressure on revenue and the elevated operating costs, we do not see a growth in earnings by FY2019, therefore we project a decline of 30.80% to NGN13.45bn.
NB Takes on More Debt to Boost Working Capital
The company has a revolving credit facility of NGN29bn with commercial banks and NGN5bn mid-term loan obtained from the Bank of Industry to meet its working capital needs. Thus, interest bearing debts stood at NGN44.81bn in Q1:2019, and this could rise by c.19.74% - 25.44% by FY2019 following the issuance of c.NGN15bn out of its NGN100bn commercial paper programme. Nonetheless, balance sheet remains relatively healthy as total debt ratio pegged at 11.55% as at Q1:2019, while interest coverage at 5.33x, is higher than the industry average of 4.47x. Despite making a lower profit compared to last year, we saw an improvement in NB's net operating accruals, as cash generated from operating activities surpassed net income by NGN3.72bn. This underscores good earnings quality, in contrast to the corresponding period in 2018 when cash flow from operations was negative.
Given the challenges in the brewery space and the pressure on the company’s bottom-line, we have reviewed our expected EPS downwards, from NGN2.95 to NGN1.68. We applied this to a target PE of 32.50x to arrive at a FY2019 target price of NGN54.60. This implies a downside potential of 15.55% to its closing price of NGN64.65 on the 26th of April, 2019. Thus, we rate as SELL.
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