Marginal change to average EPS forecast
Although Nigerian Breweries' (NB) 9M 2020 earnings were close to our forecast, its Q3 performance was broadly impressive, given that results for this quarter are typically the weakest within the year. PBT of N2.6bn was the highest since 2015 and compares with a loss of -N2.2bn in Q3 2019. The company's recovery from Q2 (affected by the lockdown) was also stronger than that of peers: PBT surged 38x q/q versus pretax losses declared by International Breweries and Guinness Nigeria. NB's performance was primarily driven by robust volume growth, leading to a 26% y/y increase in sales.
Topline aside, NB's earnings in recent quarters remain weighed down by material increases in borrowing costs. Total debt in Q3 was 80% higher y/y, bringing about a 66% y/y increase in net interest expense. The line item also missed our Q3 forecast by 44%. As such, an average increase of around 26% to our net interest expense forecast marks the steepest change we have made. That said, our 2020-22E EPS forecasts are only slightly higher by 2% on average given that 9M earnings were roughly in-line.
Indeed, the upward revision to 9M interest expense forecasts has been countered by increases to our sales estimates. Essentially, the forecast changes translate to a 4% increase to our target price to N39.3. NB shares are currently trading on a 2021E P/E multiple of 36x for a 2021-22E average EPS growth of 26%.
Year-to-date, NB shares have gained 7%, but underperformed the broad market index by -24%. Our new price target implies a downside potential of -38% from current levels. We therefore retain our Underperform rating on the stock.
Stronger volumes lift earnings y/y
The 26% y/y increase in Q3 sales was the chief driver behind NB's bottom-line improvement y/y. The other positive was a -2% y/y decline in opex. However, in addition to the negative impact of the interest expense increase, other income was down -29%.
Nevertheless, these were not strong enough to reverse the PBT improvement. On a sequential basis, Sales were up 20% q/q, leading to a 208bp q/q expansion in gross margin.
As such, PBT was significantly higher on a q/q basis despite 16% and 19% q/q increases in opex and net interest expense. Compared to our forecasts, PBT beat by 17% driven by a positive surprise of 37% in sales.