February 22, 2021/Cordros Report
Nigerian Breweries (NB) released its Q4-20 results with a reported EPS of NGN0.05 (-88.8% y/y), bringing the 2020FY EPS to NGN0.92 (-54.3%). The achieved EPS is a material miss per consensus 2020E EPS estimate of NGN1.69 and Cordros estimate of NGN1.31; the miss is attributable to a negative surprise in the finance cost line. A final dividend of NGN0.69/s was proposed, which equates to a yield of 1.2% on the last closing price (NGN59.00 on February 19). Despite delivering (1) the fastest Q4 y/y net revenue growth since 2012, (2) the first FY revenue growth since 2017, and (3) resilient EBITDA margin, we are more concerned with the effects of the naira weakness on margin. We retain our ‘SELL’ rating on the stock with a price target of NGN52.25.
NB’s Topline Has Turned the Corner: Net revenue surged 18.0% in Q4-20, bringing the 2020FY revenue broadly in line with our forecast (4.0% variance). The 4.3% revenue growth in 2020FY marked the first FY growth since 2017 following a robust post-lockdown recovery in H2. According to NB’s parent company, Heineken NV, overall volume grew low-single digit in the year, led by the premium portfolio, which grew double-digits. Additionally, prices were also higher by mid-single-digit compared to the prior year. The premiumisation strategy is bearing fruit and should continue to drive topline growth, especially amidst expected further downtrading in the mainstream category. We increase our 2021-23E revenue forecasts by an average of 4.2% to reflect the recent pickup in net revenue growth.
Final Quarter Gross Margin Pressure a Concern: NB’s gross margin materially missed our estimate in Q4-20 – margin declined to 27.9% (vs. a 38.3% average gross margin in Q1 – Q3-20). In our view, this is attributable to the impact of (1) the lingering naira weakness, (2) the COVID-19 induced surge in commodity prices, and (3) surging domestic inflation on imported and locally sourced inputs. Consequently, we lower our 2021-23E gross margin estimate by an average of 148bps only while we look out for a sustained margin squeeze before materially changing our margin outlook further. Elsewhere, we raise our EBIT and EBITDA forecasts in 2021-23FY on expectations for continued cost mitigation actions, positively impacting OPEX. We forecast that EPS will grow by 78.4% y/y in 2021FY (-54.3% y/y in 2020FY) on the preceding. Further out, we forecast an EPS CAGR of 42.4% in 2020-23FY.
Valuation Looks Stretched: NB’s share price has climbed 21.8% in the past 12 months. We believe investors have priced in most positives following the 2020 market rally. Consequently, its valuation is too rich and unjustifiable at a 2021E P/E of 38.9x compared to 18.0x for emerging market peers. Its dividend yields are less attractive at the present price levels, generating 1.6% to 2.6% in 2020-21FY.
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