International Breweries Plc Q2 2018 Results Review: New Entity; Upgrading to Neutral

OLYMPUS DIGITAL CAMERA

Culled—-Proshare

December 28, 2017/FBNQuest Research 

18% potential upside post ytd rally
 

International Breweries completed its merger with Intafact Beverages (Intafact) and Pabod Breweries (Pabod) during the quarter and listed 5.3 million additional shares on the stock exchange. The combined entity now has 8.6 million shares outstanding. The shares are trading on a 2018E P/E multiple of 28.8x for EPS growth of 28.4% y/y in 2019E. This year, the shares have gained +192% (vs. NSEASI: +41.0%). 

The rally was on the back of the company’s merger announcement in June. Regardless of the gain, we still see a modest upside potential of 18% to our price target of N63.6. Despite the upside potential, we have taken a conservative approach due to the limited information we have on the combined entity. As such, we have a Neutral rating on the stock. Our view may turn more positive once management’s disclosure improves.

Value brands supporting healthy sales and EPS growth
 

International Breweries (post-merger) has a capacity of around 4.5m hectoliters (hl) versus around 1.5m hl before the merger. The company recently invested about US$250m in a new plant in Shagamu which is expected to start production next year and should translate to additional volumes of 2-3 million hectoliters. 

The company operates mainly in the value segment which should continue to prove supportive following the market’s shift to value brands. We see average topline growth of around 17% y/y over the 2017-19E period. Our forecast is hinged on price increases in the mid-to-high single digit range. In recent times, the company has suffered some challenges involving importation of raw materials and negative effects arising from holding US$-denominated loans. 

However, due to improved fx liquidity, we believe there is limited risk of additional fx losses in the near term. We also expect the company to benefit from improved cost synergies following the merger. We have forecasted PBT margin to average around 17% over the 2017-19E period compared with 8% recorded in FY 2017(end-Mar). We see EPS growth of 33% y/y on average over the same period.

Pre-merger losses in Q2 2018 (end Sep)
 

Sales of N8.0bn grew by 20% y/y. However, the company reported pre-tax and post-tax losses of –N1.2bn and –N1.4bn respectively compared with –N216m in Q2 2017. The sales growth and a 39bp y/y gross margin expansion was not enough to offset a 41% y/y rise in opex and a –N945m reported on the other gains/losses line, leading to the pre-tax loss. Stripping out the –N945m, pre-tax loss was –N279m.

opan



investadvocate