October 29, 2018/CardinalStone Research
Nigerian Breweries Plc (NB) 9M’18 results – top line declined by 6.5% YoY to N238.1 billion, in line with our estimate of N244.8 billion (-2.7% deviation). In the same vein, after-tax earnings dipped significantly by 38.4% YoY to N14.8 billion, underperforming our estimate of N21.4 billion.
Given the unimpressive 9M’18 financial result, the company cut its interim dividend by 40.0% YoY to N0.60/share. This represents a dividend yield of 0.7% on current price of N88.0.
- In Q3’18, NB’s net revenue slumped by 11.2% YoY to N65.4 billion. According to the parent company, Heineken, beer volume declined high-single digit, attributable to increased competitive pressure. We are not surprised by this development, given INTBREW’s aggressive strategy to grow volumes in recent times, through expansion and competitive pricing. In addition, we note the significant impact of higher excise duty tax (+31.2% YoY) on overall sales.
- Notwithstanding, cost-of-sales declined at a slower pace (-3.2% YoY)—driving the cost-to-sales ratio to a high of 71.5% (vs. Q2’18: 54.2%, Q1’18: 57.6%, FY’17: 58.3%). In our recent note, Amidst competitive pressures, we mentioned that NB was a cost leader in the brewery industry, and as such, anticipated that the company could absorb some costs to retain attractive price points and had projected an increase in cost-of-sales to 65.0% in Q3’18 (6.5 ppts less than actual of 71.5%)
- We note that the company’s gross profit for the period (N18.6 billion) was not sufficient to cover its operating expenses of N22.7 billion for the period, which resulted to an operating loss of N3.9 billion. This coupled with net finance cost amounting to N1.2 billion, resulted to a loss-before-tax of N5.1 billion in Q3’18 (vs. Q3’17 PBT: N400 million).
- However, the company recorded a tax credit of N1.4 billion during the quarter, which moderated loss-after-tax to N3.6 billion (vs. Q3’17 PAT: N300 million).
For us, the narrative in the brewery landscape remains the same. We expect it to be largely shaped by intense rivalry – the ability of brewers to introduce innovative products at attractive price points and the extent of INTBREW’s aggressiveness in driving volumes with competitive pricing. Also, we cannot downplay the impact of the recently introduced specific excise duty taxes, we believe cost pass-through to consumers will remain limited, as the intense rivalry makes it rather difficult to raise prices of beer products.
In Q4’18, we expect a slight uptick in volumes QoQ, given festivities in that period – also, we note that Q4 is traditionally the best quarter for the brewers. Notwithstanding, we believe NB’s ability to grow its top line on a YoY basis will be tough, specifically in the mainstream beer space, given increased supply of beer in the Nigerian market, as well as limited ability to hike product prices.
Based on our last review, our target price for the counter is N100.05 (HOLD)