International Breweries Q3 2019 Results Review: Outlook For Post-Rights Earnings Still Bearish


November 8, 2019

By FBNQuest Research  

Deep cuts to TP and earnings forecasts

International Breweries (IB) in Q3 recorded its first y/y net sales decline (-5%) since the 2017 merger, and a record pre-tax loss of -N13.6bn. In contrast to previous quarters which showed strong double-digit growth, Q3 volumes only grew by low single digits. This slowdown was caused by the wearing off of base effects from the Sagamu plant expansion concluded in June last year.

In monetary terms, sales were largely impacted by the 17% y/y excise tax increase in June. More broadly, the sustained deterioration in IB’s earnings were also driven by a ramp up in promotions, financing cost and depreciation charges, primarily on account of the added brewing capacity. Addressing these pressure points, management during a recent discussion, indicated its willingness to raise prices in similar measures planned by competitors.

The company is also proposing a capital raise of N165bn – via a rights issue – to drive borrowing costs lower. However, the sales upside from price increases may be limited in that adjustments will mostly be applied to the premium segment, where IB has the least market share. For the rights, assuming a 100% take up, our 2019E-21E net interest expense forecasts will see a reduction of around -55% on average on the back of a deleveraged balance sheet. That said, ex-price increases, post-rights earnings for our forecast years are still in negative territory.

Essentially, our forecast changes have not yet taken into account the proposed rights issue and price increases. Following the much worse-than-forecast line items for 9M 2019, we have made significant cuts to our 2019-21E PBT forecasts. The effect of these cuts is a -41% reduction of our price target to N9.1. Year-to-date, IB shares have lost -66%, underperforming the broad market by -50%. Our new price target implies a downside potential of -11%. We therefore retain our Underperform rating.  

Q3 pretax loss tripled y/y to -N13.6bn

IB’s pretax loss for Q3 2019 was caused by a y/y deterioration of all the key line items. The biggest driver responsible for the loss was a -975bp squeeze in gross margin to 28%. opex and net interest expense increased by 46% and 2.2x to N15.8bn and N6.1bn respectively. Sequentially, gross margin contracted by -423bps q/q while opex and net interest expense increased by 12% q/q and 3.1x q/q respectively.

As such, the Q3 pretax loss was more than double -N5.2bn posted in Q2. Relative to our forecasts, gross margin was -631bps narrower than forecast while opex and net interest expense missed our forecasts by 32% and 66% respectively. The pretax loss was therefore quadruple our forecast of -N3.4bn.

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