Thursday, July 14 2016 9:22AM /FBNQuest Research
Event: Nigerian Breweries reports Q2 2016 results
Implications: Likely downward revisions to consensus 2016 PBT forecast
Positives: No obvious positives
Negatives: PBT declined by 36% y/y
Late yesterday, the NSE published Nigerian Breweries’ (NB) Q2 2016 results which showed that PAT of N8.6bn fell by -24% y/y. Although sales of N79.8bn declined marginally by 2% y/y, a combination of factors including a 9% y/y rise in opex, a 447% y/y increase in net interest expense and a gross margin contraction of -333bps y/y to 46.0% resulted in PBT declining by -36% y/y.
Further down the P&L, the y/y contraction in PAT narrowed to -24% mainly due to a -1,297bp y/y reduction in the effective tax rate to 18.3%. Sequentially, sales were up by 3% q/q. However, PBT and PAT fell by -30% q/q and -18% q/q respectively. Similar to the y/y trends, a -1,204bp q/q reduction in the tax rate was the major factor behind the smaller contraction in PAT q/q vs. the PBT.
The sequential declines on the PBT and PAT lines are significant because the Q2 quarter is typically the second strongest in the year after Q4. This is the first time in recent memory that Q2 earnings / PBT will come in below that of Q1. Compared with our estimates, while sales missed by -10%, PBT and PAT both missed by -44% and -35% respectively. Apart from the weak topline, the negative surprise in net interest expense also contributed to the magnitude of the declines in PBT and PAT.
Pending comments from management, we believe that the weak topline y/y is reflective of the slowdown in the level of economic activity during the quarter. While Q1 2016 GDP contracted by -0.4%, fuel supply issues, industrial strikes, lower crude oil output, disruptions to gas supply following the vandalisation of pipelines and a reduction in government revenue all combined to constrain demand during the quarter.
As such, expectations are that these factors will most likely lead to a more severe contraction in Q2 GDP compared with Q1. We await data from the National Bureau of Statistics for confirmation. Moving further down the P&L, we believe that the spike in net interest expense was most likely due to exchange rate losses driven by the movement in the naira exchange rate to c.N282.5 per US dollar following the adoption of a more flexible exchange rate regime compared with US$197.0 previously.
Although we had estimated a 20% hit to PBT, the results show that the impact may have been much more than we had anticipated. Being the first major company to report its Q2 2016 results, NB’s results provide a broad read-across for the earnings expectation for the brewers and consumer goods companies as a whole.
When annualised and adjusted for seasonality, NB’s Q2 PBT of N10.5bn tracks behind consensus 2016 PBT forecast of N56.8bn. As such, we expect to see downward revisions to consensus 2016 earnings forecast and a sell-off in the shares over the next few days. The shares have underperformed the index slightly ytd. They are down by -2.2.% ytd compared with the 0.3% ytd return delivered by the index.
We rate NB Neutral. Our estimates are under review.
Nigerian Breweries Q2 2016 results: actual vs. FBNQuest Research estimates (N millions)