| Stock & Analyst Updates |    7179 VIEWS  |
| Stock & Analyst Updates | |
| 7179 VIEWS | |
 |
Thursday,
February 22, 2018/ 6.00 PM/ ARM Research
Last week, Management of Nigerian Breweries (NB) hosted a
conference call to discuss its FY 2017 results as well as provide its outlook
for 2018. In this note, we update our views on NB following the FY 2017 results
and revise our 2018 forecasts to ascertain if there is still any upside
potential for the stock.
After touching a seven-month low in 2016 (N28.4 billion), earnings
recovered in 2017, rising 16.2% YoY to N33 billion underpinned by an
improvement in the operating environment relative to the prior year. However,
earnings remained below pre-2016 trend level due to sustained weak consumer
income and increased industry competition.
Notably, constrained consumer income adversely impacted on volumes
with the company reporting a mid-single digit decline in sales volume over
2017. Precisely, management noted slight loss of market share in the review
period on the back of strong price increases at the tail end of 2016 which was
not implemented immediately by competition. In addition, NB’s parent company –
Heineken– noted that consumer downtrading impacted negatively on sales for its
premium brands while value brands continued to outperform the broader
portfolio. Irrespective, revenue over 2017 rose 9.8% YoY to N344.5 billion,
underpinned by higher YoY prices. 
Cost pressures prevail in the quarter: Input cost pressures lingered
in 2017 which drove a faster increase (+12.8% YoY) in Cost of Goods Sold (COGS)
than revenue (+9.8% YoY). At the conference call, management explained that the
pressure on COGS reflected higher domestic inflation. NB sources around 50% of
its raw materials locally (Sorghum, Sugar and Cassava starch) which exposed the
company to rising local prices. Precisely, the price of Sorghum rose 32% YoY
which, we believe, impacted on COGS. Against this backdrop, gross margin
contracted 153bps to 41.7%. In our view, the switch in FX sourcing to the NAFEX
window from NIFEX also impacted on COGS. Irrespective, lower net finance
expense (-21.9% YoY to N10.7 billion) masked the impact of top-line pressures
on core earnings. The decline in finance expense stemmed from a substantial
drop (-33.4% YoY to N5.0 billion) in foreign exchange losses due to currency
stability over 2017.
Other key highlights from the call
Consumer downtrading: Management stated that the pace of consumer downtrading slowed
in the second half of 2017. Consequently, volumes were better in the second
half when compared to the first with its international premium brand – Heineken
– returning back to growth.
New product: In December 2017, Nigerian Breweries introduced a new lager
brand – Stella beer – in a 60cl bottle across four key regions in Nigeria.
Stella Beer is an international brand at a price point in the premium segment.
According to management, initial feedback on the product was encouraging.
Changes to the excise duty rate: Management acknowledged that the government is
proposing to make changes to the excise duty rate. NB mentioned that the
government plans to change the structure of excise duties to a specific model
(wherein tax is levied on volumes sold) from an ad valorem tax model which
basically charges a rate (currently 20%) on production costs. According to
management, the policy decision is positive for the brewery industry as the
specific model is more efficient, transparent and easily administered. However,
the company further stated that the implementation would have a negative impact
on COGS and looks to pass on the increase to consumers in a more efficient
manner.
Sales growth momentum set to moderate: In 2018, strategies to drive
volume induced revenue growth seems to be the focus of management even as we
envisage limited price increases in the year. Management plans to achieve
volume growth via leveraging on its strong distribution network as well as
increasing availability of products amidst rising industry competition. While
we acknowledge these initiatives, we do not expect to see a sharp increase in
revenue given that the operating environment remains challenging. In addition,
the country’s exit from recession is yet to translate to a sizeable improvement
in consumer wallets which also guides to a slow rebound in sales volume.
Against these backdrop, we forecast a modest increase in revenue (+3.5% YoY to
N356.6 billion) in 2018.
We forecast COGS to rise 3.8% YoY to N208.6 billion to capture the
impact of increasing cost of key raw materials including Sorghum and Barley.
This, combined with our revenue expectation translates to a 3.1% YoY increase
in gross profit to N148 billion which should see gross margin decline 16bps YoY
to 41.5% (FY 17: 41.7%). Similarly, we forecast operating costs to rise
modestly by 2.6% YoY to N90.9 billion, driven by a slight increase in marketing
and distribution expenses (+2.9% YoY) to capture the company’s plan to drive
visibility and availability of its products. The foregoing translates to EBIT
of N57.1 billion (+3.9% YoY) with related margin forecasted to increase 7bps to
16.0%.
In view of our expectations for ongoing currency stability, we
foresee lower FX losses in 2018. This, coupled with the low yield environment
underpins our forecast of 2018 finance expense at N6.5 billion (-38.9% YoY).
Net impact of our model revisions translates to PBT and PAT of N51.5 billion
(+10.5% YoY) and N36.1 billion (+9.12% YoY) respectively.
Nigerian Breweries trades at a forward P/E of 28.4x vs. 32.9x for
Bloomberg Middle East and Africa. NB has declined 5.1% YTD relative to a
positive return of 10.2% for the NGSE INDX. We retain our SELL recommendation
on the stock with a FVE of N121.30. 
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