Further price increases expected over the '21f period
We have upgraded our NB forecasts due to its better-than-expected results in Q1 '21 and our confidence that it will maintain the impressive momentum over the coming quarters. As a result, we have increased our EPS forecasts over the '21-22f period by 40% to NGN2.53 (from NGN1.81 previously). Our new price target of NGN58.4 is also up by around 29%, and reflects an increased risk-free rate of 12.5% (prev. 11.0%). In upgrading our forecasts, we were guided by management's disclosure that volumes grew by mid-teens y/y in Q1 '21, with the premium portfolio expanding by around 40% y/y (on favourable demand for Heineken and Tiger).
We are also aware of management's price increase in March '21, after successive price increases in 2020. We expect firm demand through '21f. On the back of the foregoing, we have raised our sales forecast by 9.5% to NGN385.9bn (which is behind annualised Q1 '21 sales of NGN422.7bn). Consequently, we have also elevated our gross margin estimate by +150bps to 37.5% (+228bps y/y), to reflect the better cost management in Q1 '21. Further down the P&L, we have increased our Opex (operating expenses) forecast by 10% to NGN104.2bn (from NGN95.1bn) for FY '21f, while net interest expense is reduced by 5.0% to NGN13.1bn. Following these changes, our PAT forecast for '21f is now higher by 41.6% to NGN18.1bn.
This implies an EPS of NGN2.20 (+156.9% y/y from NGN0.85 in FY '20). On the balance sheet, we have changed our net working capital estimate in '21f to -NGN109.9bn (-NGN111.2bn previously), after we adjusted working capital assumptions to align with trend in Q1 '21. Following these adjustments, we upgrade our rating on NB to Neutral (from Underperform). NB trades at a '21f EV/EBITDA of 6.3x which is behind EM & global peers average of 16.4x and 21.9x respectively. Year-to-date, NB shares have shed -2.9% vs. the ASI's -2.1%.
NB had a stellar Q1 '21
NB's results in Q1 '21 beat our forecasts as the company delivered an EPS of NGN0.91 (+32% y/y, ahead of our forecast and consensus estimate of N0.41). The company's revenues grew by 27% y/y and 3% q/q respectively to NGN105.7bn, ahead of our forecast of NGN88.1bn. Gross profit rose by 14% y/y and 38% q/q respectively to NGN39.7bn, while operating profit increased by 32% y/y and 106% q/q respectively to NGN14.1bn.
Although gross margin contracted by -437bps y/y to 37.5% in Q1 '21, it was broadly in line with our estimate of 37.6%. Pressures linked to fx devaluation and higher raw material prices, in our view, accounted for the high cost of sales (+37% y/y). Further down the P&L, net interest expense surprised positively, with an outturn of NGN3.0bn (behind our estimate of NGN3.9bn). Also, the company's operating free cash flow rose to NGN8.1bn in Q1 '21 vs. -NGN10.0bn in Q1 '20, due to better working capital management.