Nigerian Breweries Plc: Cut to Estimates; SELL Rating Maintained

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November 10, 2017/Cordros Research

We cut NB’s 2017F EBITDA and net profit forecasts by 14% and 23% respectively, on downwardly revised revenue growth and gross margin estimates, following the surprise miss in Q3. We also cut forecasts for 2018-2019 by 8% and 13% average respectively, specifically on the cut to revenue forecasts. On net, we cut our TP for the stock by 3% to NGN123.16/share and reiterate our SELL rating on the stock. We also roll forward our estimates and valuation by one year.

We cut revenue growth estimate to 12% (previously 18%), after realized Q3 sales came 9% behind our estimate, notwithstanding that price was increased at the beginning of the quarter. Average growth estimate of 5% for 2018-2019 is unchanged, as the effects of price hikes wane. Significant moderation of inflation on stronger naira and election-related spending, are upside risks to our estimates.

We cut gross margin estimate for 2017 by 220 bps to 43% and by 100 bps average to 44%, for 2018-2019. While we consider the surprise 1,100 bps decline in Q3-17 GM one-off (as we do not expect amount recognized for technical fees will remain elevated), the slight downward revision to 2018-2019 estimates reflects the upward price outlook of key production material inputs. Specifically, the price of BARLEY is forecast to rise +6% over 2018-2019 while the increase in locally sourced SORGHUM price could be more, on rising domestic and external demand, amidst slowly growing production. And while acknowledging the better macro outlook, we expect a fundamental change in the current pattern of consumption in the beer industry (i.e. strong growth of the value beer segment) to lag.

Net impact of the above changes is for EBITDA and net profit growth of 15% (previously 33%) and 27% (previously 64%) respectively in 2017F, and 2018-2022 CAGR of 6% and 6.6% respectively. NB’ share price has declined 13% QtD and 3% YtD, and we estimate the stock is trading on 2018F P/E of 25.9x, implying 14% and 5% discounts respectively when compared with its five-year historical P/E of 30x and Bloomberg’s MEA 1-year forward peer average of 27.3x.

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