Nigerian Breweries Plc (NB) published its H1-2020 unaudited financial result earlier. Revenue dipped by 10.8% to N151.8bn amid restriction on movements, a complete ban on pubs, bars, and social gatherings, especially weekend parties since March-2020 which dragged volume growth across the sector. However, higher finance and input cost as well as OPEX, worsened the impact of weaker revenue on PBT and PAT which fell sharply by 57.0% and 58.0%y/y to N8.3bn and N5.6bn, respectively. We update our estimates for the brewer based on the recently published numbers and review our expectations for FY-2020E below.
Restrictions in social gathering negatively impact NB’s financial performance: According to the parent company (Heineken N.V), the country-wide restrictions in movement and social gatherings in Nigeria negatively impacted NB’s Revenue during the period. Unsurprisingly, alcoholic drinks were not considered an essential item, exempted from the restrictions in most States. However, given NB’s diversified product portfolio and nation-wide footprints, the company was still able to push its non-alcoholic malt drinks in States where distributions of alcoholic drinks were banned. Accordingly, NB’s leading non-alcoholic brand, Maltina, came in broadly flat in H1-2020. Also, the company’s international premium brands, including Heineken and Tiger, grew mid-single digit during the period. Overall, NB’s Revenue declined by 10.8% y/y to N151.8bn as mainstream and discount brand volumes (Goldberg, Life Continental, Williams, Turbo King and More lager) contracted during the period).
Elsewhere, slower decline in Cost of Sales (down 6.0% y/y to N92.7bn) relative to Revenue (-10.8% y/y/) dragged Gross Profit by 17.5% y/y to N59.1bn. Consequently, Gross margin moderated from 42.1% in H1-2019 to 39.0% in H1-2020. We suspect that the relatively slow contraction in Cost of Sales must have been a result of global and local supply chain disruptions which spurred prices of key inputs higher, especially in Q2-2020.
Also, Operating Expenses (OPEX) declined 6.7% y/y to N44.4bn, as Marketing & Distribution Expenses dipped 10.0% y/y to N34.3bn while Administrative Expenses rose 6.9% y/y to N10.1bn. The sharp decline in the Marketing & Distribution costs can be attributed to the restrictions in movements that characterized Q2-2020. Thus, Operating Profit fell sharply by 38.5% y/y to N15.0bn. Net Finance Cost increased by 32.6% y/y to N6.7bn as Interest Expense rose by 29.9% y/y to N6.8bn while Finance Income declined by 37.6% to N123.8mn. The higher Interest Expense was driven by higher Interest-Bearing Liabilities (up 150.1% ytd to N139.4bn) amid the February and April -2020 commercial paper issuances done by the company to finance working capital. Overall, PBT and PAT fell by 57.0%y/y and 58.0%y/y to N8.3bn and N5.6bn respectively and net margin deteriorated by 4.1% to 3.7%.
NB rated a HOLD at current price: Our short-term outlook for the Brewer is underwhelming as we expect FY-2020E Revenue to dip by 5.5%, largely dragged by the underwhelming performance in H1-2020. Although Q3 is a seasonally weak quarter, we expect Revenue to mildly improve in H2-2020 amid our expectation for a strong outcome in Q4-2020 as the FG gradually eases existing restrictions on social gatherings and movements through the period. Also, we believe the resumption of inter-state movements early in Q3-2020 and the high probability of the resumption of international trade should ease supply chain disruptions and pressures on Cost of Sales. NB is likely to commit more resources to marketing and distributions in H2-2020 to drive volumes and this likely to pressure OPEX higher. Adjusting our model assumptions for the above, we revise our year-end Target Price downwards to N33.6/share (Previously N59.5/share) with a HOLD rating on the stock.