INTBREW: Weaker-than-expected Q3 2015; NEUTRAL Rating Maintained


Thursday, March 26, 2015 4:00 PM / FBN Capital Research


Modest cuts to our PT, Neutral rating maintained:

International Breweries’ Q3 2015 (end-Dec) PBT came in well behind our forecast. As such, we have cut our 2015-17E EPS forecasts by an average of 15%. The downward revision to our EPS forecasts is mainly driven by a negative surprise on the net interest line in Q3 (-N922m vs. -N119m in Q2).


Despite these cuts, we have revised our price target modestly to N23.9 from N24.4 owing to a 100bp reduction in our WACC to 14.1%. Our lower WACC is driven by a sizable increase in the firm’s financial leverage. With the shares having shed -25% in the last quarter, our price target implies an upside potential of 32.8% from current levels.


We have maintained our neutral rating on the stock which is trading on a 2015E P/E multiple of 30.3x for 2016-17E average EPS growth of 13.1%.


Sales growth of 7% y/y:

Q3 2015 sales grew 7% y/y, while PBT and PAT both declined, by -80% y/y and -89% y/y respectively. A -551bp y/y gross margin contraction to 53%, a 344% increase in net finance costs and a 17% y/y increase in opex were the main drivers of the declines on both earnings lines.


Although global raw material (c. 80% of COGS) average prices over the October - December period declined by around 26% y/y, it appears that the price declines were more than offset by the devaluation of the naira – much more than we anticipated. We cannot fully attribute increase in finance charges to naira devaluation, as the sum, when annualised, almost equates to the US$25m loan International Breweries took on.


As such, we have deemed it a one-off cost and therefore, unsustainable. On a sequential basis, sales were up 8% q/q, owing to seasonality while PBT and PAT were down 74% q/q and 86% q/q respectively.


We maintain our view that down-trading of consumers to value brands (which is International Breweries’ forte) would support sales growth going forward. Although it may not be able to successfully pass on raw material cost increases (fully) arising from fx pressures, we believe economies of scale will support gross margins as the company is aggressively expanding capacity.


We expect EPS decline of -9.7% y/y for 2015E following an anticipated 45% increase in finance charges, and 40.3% y/y average EPS growth over the 2016-17 period.

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