February 14, 2020/Cordros Report
Net revenue grew 1.2% y/y (2019FY: -0.4% y/y) in Q4, albeit lower than our estimates (3.9% variance), on price and mix gains, with revenue benefitting from slight price increases taken across its premium portfolio in the period. This is the strongest y/y revenue growth since Q3-17. Heineken NV (NB’s parent company) in its 2019FY earnings call, stated that Heneiken brand and the premium portfolio recorded double-digit volume growth. We note that gains at the gross revenue level were slightly eroded by the higher excise duty expense compared to last year – NB did not report gross revenue and excise duty numbers in its 2019FY results. Sequentially, net revenue grew 33.3% q/q – the impact of the price increases and Q4 being a seasonally strong quarter due to the year end festivities.
Gross profit margin (+288 bps y/y) widened to 40.2% in Q4-19, although was lower than the 44.4% we estimated. The gross margin recorded was the best Q4 performance in 2 years and was driven by continued productivity gains (COGS declined 3.5% y/y) as well as the continued growth in the high margin premium segment.
OPEX rose by 8.9% y/y in Q4-19, resulting in an operating expense ratio (OER) of 28.9%, both lower than our estimates. The result shows an 21.7% y/y increase in Advertising and sales promotions (10.0% of total OPEX) reflecting its focus on increasing brand visibility – ‘sell-out’ strategy. Other income grew 1.5% y/y on one-off income from Insurance Claim; combined with the improved gross profit, this was enough to offset the rise in OPEX, resulting in EBIT and EBITDA growing by 8.9% y/y and 8.1% y/y, with 11.5% (+82 bps) and 20.9% (+134 bps) margins, respectively.
Elsewhere, net finance costs surged 72.5% following 64.9% increase in finance costs and 74.0% decline in finance income. Higher finance costs were due to the NGN30 billion worth of commercial papers issued in the year. We also note that total debt, as at Dec-2019, increased by 35.5% to NGN55.72 billion (2018FY: NGN41.13 billion).
NB also recorded much stronger cash generation (Operating cashflow: +27.4% vs. 2018FY), following a significantly reduction in its trade receivables (NGN21.31 billion vs NGN35.15 billion in 2018FY)
Comment: We like that the company continues to record improved (1) improve volumed outturn, (2) productivity, and thus (3) relatively strong gross margins, especially amidst the challenging operating environment. Following further price increases to cover the VAT adjustment, we expect sustained improved performance in Q1-20. NB’s share price is down 12.7% YTD and the stock is trading on 2020E P/E of 17.3x, a discount to historical average forward P/E of 22.8x. Our estimates are under review.