International Breweries: from the west to the world


Wednesday, February 24, 2016 7:00PM / GTI Capital 

International Breweries Plc (“The Company” or “IB”) released its Q3 2016 unaudited report for the nine months ended December 31 2015 on January 29 2016. The Company reported a 7.49% rise in revenue to N16.46billion ($82.30M) from N15.31billion ($76.56M) YoY, complemented by the 12.60% expansion in the company’s property, plant & equipment line item of the balance sheet, while net income improved by 18.00% to N1.71billion ($8.55M) from N1.45billion ($7.24M) YoY. The Company’s ability to grow its revenue base is aided by the associated year end festivities which boosted volume sales. Considering the high competition rate in the larger space of the brewery sector in Nigeria, this growth is impressive. 

Gross profit advanced stronger by 10.55% to N8.29billion ($41.46M) from N7.500billion ($37.50M) YoY. The stronger growth in gross profit as against revenue is adduced to the comparatively slower growth in input cost in the review period. Gross profit margin subsequently strengthened to 50.37% from 48.98% YoY. Marketing, admin & other expenses line item on the other hand expanded by 16.39%, faster than revenue and gross profit growth. Consequently, operating profit growth was a sluggish 3.27% while Operating profit margin settled at 20.95%, down marginally from 21.80% YoY.  

Pre-tax profit rose by 7.09% to N2.40billion ($12.02M) from N2.24billion ($11.22M) boosted by a 9.94% reduction in finance cost and a 16,764% spike in finance income in the review period. Net income also recorded an 18.00% improvement, aided by slightly above 600 basis point reduction in effective tax rate provision to 28.91% from 35.45% YoY.  

The company had short term liquidity pressures as a result of the N3.84billion ($19.20M) trapped in trade receivables, as well as the N2.95billion ($14.75M) inventory pile, about 30% of which is finished goods yet to be sold. IB consequently resulted to short term borrowings of about N4.59billion ($22.98M) to ease its working capital challenges.  

In addition, IB also had long term borrowings of N4.86billion ($24.32M) down from N7.83billion ($39.15M) in the corresponding third quarter 2015. Debt to equity settled at 72.49% from 72.07% YoY. IB is currently expanding its production capacity and has increased its borrowing to fund its expansion which accounts for the relatively high debt to equity ratio of IB. 

On a quarter on quarter analysis of Q3 2016, IB racked up an impressive revenue growth of 28.97% to N6.32billion ($31.60M) in Q3 2016 compared with a 5.91% contraction between Q1 2016 and Q2 2016. The company also recorded improvements in gross profit (29.03%), operating profit (75.73%), pre-tax profit (268.26%) and net income (253.94%) in the Q3 2016.  

The strong Q3 2016 figures were boosted by the associated year end festivities which accounted for a rise in volume sales. IB’s strategy of consolidating its foothold in its local market through aggressive expansion has also paid off significantly despite all the challenges in the wider brewery sector. We expect this momentum to continue. However, we do not expect Q3 2016 sales level to be repeated in the fourth quarter, but we expect sales volume to surpass Q2 levels.  

Based on our analysis, the stock is currently trading at a 31.25% discount to our estimated fair value of N26.25 ($0.13), with a 12 month investment horizon.  

Our fair value for the shares of IB was calculated using the Dividend Discount Model comprising our expected dividend estimate for the company and GTI Securities customized tweak to adjust for the risk of investing in the Nigerian consumer goods sector. Our Required Rate of Return (RROR) factors in a risk premium of 12% and the yield for the most recently issued 20-Year FGN Bond was applied as the risk free rate of return.  We have placed a BUY rating on the stock of IB because the stock is undervalued based on our analysis.


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