Nigerian Breweries Q3 2019 Results Review: Maintaining Underperform Rating


Monday, November 04, 2019 /10:30 AM / By FBNQuest Research / Header Image Credit: Nigerian Breweries


-13% cut to average EPS estimates 

Nigerian Breweries' (NB) Q3 2019 pre-tax loss of -N2.2bn was primarily driven by a surge in borrowing costs. The company's total debt more than tripled y/y to N72.8bn. As such, net interest expense increased by 2.4x y/y to -N.2.9bn. NB's performance was also affected by the change in excise regime. Beer volumes grew by low-single digit y/y, driven by the premium segment, but this was eroded by a 30% increase in excise tax charge.


To compensate for rising costs, management has communicated plans to implement price increases across selected brands this month. In our view, the impact of this move on volumes will likely be manageable considering that i) NB's value lager segment - in which price sensitivity is mostly exhibited - will be excluded; ii) Guinness Nigeria's management has also confirmed that it will raise prices of its premium brands; and iii) International Breweries - which has a history of undercutting competition - has a weak presence outside of the value lager market. Nevertheless, our sales forecasts remain volume-driven until updated prices are officially announced.


Relative to our forecasts, NB's 9M 2019 sales were broadly in line. We have however updated our estimates for other key line items in response to their deviations. Essentially, we have cut our 2019-21E forecasts by -13% on average. Our new price target of N59.2 is therefore -9% lower than previous. Year-to-date, NB shares have shed -46%, underperforming the broad market index by -25%. The shares are currently trading on a 2020E P/E multiple of c.15.0x for a 2020-22E average EPS growth of 21%. Our new price target implies a potential upside of 27% from current levels. We however retain our Underperform rating despite the upside, given the bearish near-to-medium term outlook for the beer industry.


Q3 loss was an improvement from Q3 2018 

Although sales only grew by a marginal 0.1% in Q3, gross margin expanded by 895bps to 37.4%. Bottom line was however negatively impacted by a 140% y/y increase in net interest expense and a 6% y/y increase in opex. Other income was up 55% y/y but this was offset by the increases in opex and net interest expense. The loss was however smaller than the pre-tax loss of -N5.1bn recorded in Q3 2018. Sequentially, sales fell by -25% while gross margin contracted by -466bps.


Consequently, the Q3 pre-tax loss compares with the Q2's PBT of N8.0bn. The loss was also significantly behind our Q3 forecast of N5.9bn on account of negative surprises in gross margin (-155bps), opex (29%), and net interest expense (13%).


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