February 28, 2020
-9% cut to average EPS estimate over the 2020-22E period
Nigerian Breweries (NB) grew beer volumes by low-single digits in 2019 following two consecutive years of decline. The recovery was driven by double-digit growth in the premium lager category. That said, despite price increases late last year, FY sales in naira terms were flattish y/y at N323.0bn as a result of the 17% y/y excise tax increase to N0.35/cl. Further down the P&L, higher borrowing costs y/y were largely responsible for a -21% y/y decline in FY PBT to N23.3bn. Management explained that it took on more borrowings to reduce a backlog of related-party payables since 2016.
As such, net finance expense for 2019 increased by 57% y/y to -N11.9bn, and surprised negatively by 13%. Over the coming quarters, we expect the impact of the company’s increased leverage to be tempered by a lower interest rate environment. Our interest expense forecasts for 2020-22E are therefore higher by around 13% on average. For topline, we highlight that NB has fully passed on the VAT increase this year. Discussions with distributors also suggest that Guinness Nigeria has done this as well. However, International Breweries (IB) appears resolute in its decision not to raise prices.
We therefore see price competition as a key risk to volume growth for NB in 2020. Nevertheless, our earnings forecast changes are largely driven by the negative surprise in FY net finance cost. Essentially, our 2020-22E average EPS and new target price of N57.9 are lower by -9% and -6% respectively. Year-to-date, NB shares have sold off by -24% and underperformed the broad market index by -23%.
The shares are currently trading on a 2020E P/E multiple of 21.8x for a 2020-22E average EPS growth of 12%. Our price target implies a potential upside of 29% from current levels. We however retain our Underperform rating despite the upside, considering the ramp-up in competitive headwinds fueled by IB.
Q4 PBT down -3% y/y
Although sales were flattish y/y in Q4, gross margin expanded by 288bps y/y to 40.2%. Bottom-line was however negatively impacted by a 3.2x y/y increase in net interest expense and a 11% y/y increase in opex. As such, PBT for the quarter declined by -27% y/y to N6.2bn. On a sequential basis, sales grew by 33% q/q while gross margin expanded by 272bps q/q. However, net interest expense increased by 32% q/q while other income was down -35% q/q.
Nevertheless, Q4 PBT compares favourably with the Q3 pre-tax loss of -N2.2bn. Q4 PBT missed our forecast of N8.2bn by -25% on account of negative surprises of -168bps and 55% in gross margin and net interest expense respectively.