February 21, 2017/Cordros Research
Late yesterday, NB released Q4-2016 and final results for 2016FY. Not surprising, 2016FY EPS was at record low N3.58 (vs. our estimate of N3.35), as gross margin compression (528bps) and significant increase in finance costs more than offset single-digit revenue growth (7%) and a well-contained operating expenses. The Board has proposed a final dividend of N2.58, which if approved, equates to total dividend of N3.58, in addition to the N1.00 interim dividend paid late last year. Surprising, management noted that at the Board Meeting held last week, the Directors further approved an option for qualifying shareholders to receive new ordinary shares (on terms and conditions as the Directors may determine) in the company instead of the final dividend.
Q4-2016 was expectedly challenging for NB. PAT fell 30% y/y, rounding off the significant underperformance experienced in the second half of 2016 (where PAT fell by 44% vs. -11% in the first half). Although revenue grew at double-digit (15% y/y and more than our 3% y/y estimate) in the final three months, the pass-through to earnings was cut short by the 42% y/y expansion of COGs, in reflection of the 1100bps decline in gross margin (to 42%, in line with our estimate). Heineken N.V. (NB’s parent company) noted in the media release on its 2016 full year results that the tough market conditions experienced in Africa, Middle East and Eastern Europe was most notable in Nigeria.
NB took phased price increases in 2016, including in the fourth quarter, to partially protect margins amid galloping cost inflation (imported and local) and increased share of low-margin brands in the sales volume mix. The flat volume (as noted by Heineken) recorded in the second half was not unexpected, given that NB increased prices faster during the period (by cumulative 22%) compared to the first half (where single-digit volume growth was reported).
Also in the final quarter, finance costs increased by 27% y/y to N3.16 billion, outpacing our N2 billion estimate. In its common practice, NB significantly reduced total outstanding debt to N17.87 billion at the end of the year, after the long term borrowing of N34.5 billion reported in the third quarter was wound down to N17 billion. The FX loss component of the 2016FY finance costs (+ 66% to N13.65 billion) was N7.55 billion, from N752 million in 2015FY.
Investors have reacted negatively to the broad consumer goods stocks in anticipation of poor 2016FY results. Specifically, the share price of NB has declined 19.04% YTD based on yesterday’s closing price of N119.81.
We expect market conditions to remain tough over 2017, with NB’s margins likely to suffer further (albeit marginal) dilution amid narrow revenue growth. That said, continued strong lid on operating expenses (+3% in 2016FY), and importantly, less disruptive FX losses (assuming no major devaluation is announced) could make the difference in NB’s performance in the current financial year. SELL.
Analysts and investors conference call/webcast on the result will hold on Thursday, 2nd March, 2017 at 15.00 hrs Lagos/ 14.00 hrs London/ 09.00 hrs New York/16.00 hrs Johannesburg.