August 10, 2020
by FBNQuest Research
-14% cut to average EPS estimates over the 2020-22E period
Nigerian Breweries’ (NB) Q2 results show a PBT decline of -99% y/y, marking the worst second-quarter performance since as far back as we can track. The PBT was also significantly behind our forecast by -97%. The lockdown during the quarter as well as a sharp increase in borrowings were the chief drivers behind the decline. Indeed, beer consumption in Nigeria is predominantly done via on-trade channels (particularly open-air bars), hence the movement restrictions were responsible for a double-digit decline in beer volumes for NB.
During the quarter, NB also took on additional borrowings largely via commercial papers, bringing about a 2.4x y/y increase in total debt to N141bn. As such net interest expense was 66% higher and missed our forecast by 51%. Given a -21% PBT miss for H1, we have cut our forecast year earnings largely on the back of changes to sales and net interest expense forecasts. We model an average cut of -14% to our 2020-22E EPS forecasts, whereas our price target is down -7% to N37.7 given the roll over of our valuation to 2021.
NB shares are currently trading on a 2020E P/E multiple of 25x for a 2020-22E average EPS growth of 4%. Year-to-date, NB shares have sold off by -46% and underperformed the broad market index by -39%. Consequently, our new price target implies an upside potential of 18% from current levels. We however retain our Underperform rating despite the modest upside, given the weak demand outlook over the near-to-medium term.
Worse sales and borrowing costs drive lower PBT
Sales were down -21% y/y, resulting in a -673bp contraction in gross margin. Opex was down -23% but this was muted by a 66% y/y rise in net interest expense and the sales decline. There was also a tax credit of N14m but the impact of this was negligible on PAT, which was down -98% y/y.
On a sequential basis, sales and gross margin declined by -18% and -653bps q/q. Opex was down -16% whereas net interest expense was up 54%. Similar to the y/y change, PBT was therefore down -99% q/q. Compared to our forecasts, PBT missed by -97% driven by negative surprises in sales (-13%) and net interest expense (51%).