International Breweries Q3 2018 Results Review: Neutral Rating Maintained

Culled—Proshare

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December 5, 2018/FBNQuest Research

Material cuts to earnings forecasts

International Breweries’ (IB) Q3 2018 (end-Sep) results were broadly behind our estimates. Sales for the quarter surprised positively (+13%) but this was more than offset by a 500bp underperformance in EBIT margin. Consequently, Q3 pre-tax losses were 83% worse than forecast. 

Although IB’s sales have lately been driven by additional volumes coming from its recently-commissioned Sagamu Plant, margins remain under pressure. Of more concern, the company’s performance has not lived up to post-merger projections as expected synergies have failed to materialise. Indeed, published results post-merger suggest that inefficiencies may be coming from Pabod and/or Intafact, and these are weighing on combined earnings. 

Given Q3 results, we have made significant cuts to our earnings estimates over the 2018-20E period and revised our price target downwards by around 34% to N31.1. Year to date, IB shares have lost -43.6%, worse than the broad index which is down -19.6%. From current levels, the shares show an upside potential of +7% to our fair value estimate. That said, considering our negative outlook on earnings over our forecast period, we retain our Neutral rating on the stock.

Net earnings stuck in negative territory

Recently published results, which included earnings for Pabod and Intafact, do not show comparable figures for the corresponding quarter of the prior year. As such, we were unable to do y/y comparisons in our analysis. 

What is clear, however, is that pre- and post-tax losses of –N3.9bn and –N4.2bn were recorded for Q3, with earnings completely eroded by opex and net interest charges. On a sequential basis, sales grew by 11% q/q, whereas contractions in margins led to a q/q deterioration in net earnings.

Outlook

Looking ahead, we see IB continuing to undercut competitors in its attempt to gain more market share. We also expect that it will aggressively push more of its brands into the Lagos market (an important market for the Brewers) following increased capacity at Sagamu. 

We however see IB’s price competition coming at the expense of margins, which are already constrained. In our view, to ease pressure on bottom line, IB’s management may need to look to take further steps to reduce expensive debt and/or shift to equity sources of financing.

opan



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