STANBICIBTC Stockbrokers: Nigerian Breweries released 1Q18 results that were largely in line with Heineken’s trading update, which reported a high single digit volume decline for Nigeria. Revenue declined 9% y/y amid relatively flat prices, while net earnings declined slightly faster at 11%, largely due to higher finance charges.
Continued decline in volumes a concern: Heineken, in its trading update, attributed the volume decline for Nigerian Breweries to destocking by distributors. A high single digit decline is rather steep and we are hesitant to attribute the bulk of this decline to competition. Still, International Breweries continues to make significant inroads into the larger Lagos market with relatively little marketing. SBGS’ retail survey for 1Q18 showed that International Breweries’ Trophy now trades at a similar price point as Nigerian Breweries’ Goldberg in the South West. While Guinness still trades at a discount, it increased prices by 13% on average in the quarter. We would expect that this would give Nigerian Breweries some breathing room, although the fact that a large portion of Nigerian Breweries’ beer portfolio is relatively more expensive than peers, in the presently price sensitive beer market, is not helpful.
Net earnings declined 11% partly due to higher net finance charges: Notwithstanding the volume decline, we see a silver lining, in that gross margin expanded to 45.8%, the strongest performance since 2Q16. EBIT margin came in flat y/y at 21% but materially stronger than FY17 performance of 16.6%. If this run rate was maintained for the better part of FY18E, then Nigerian Breweries is likely to deliver stronger y/y earnings growth for FY18E. The strong margin performance was undercut by a 37% y/y increase in net finance charges, no thanks to higher borrowings and reported FX losses. The increase in borrowings in the quarter has been attributed to the need to pay dividends earlier in the period. FX losses of c.N1.5bn following N5bn of booked FX losses in FY17 also lowered earnings.
Risks: The planned excise duty increase effective 4 June 2018 is the key risk we see to sector volumes/margins in the near term. Heightened competition with three big brewers in a price sensitive market is another downside risk. The undisclosed reason for Nigerian Breweries’ incurred FX losses is also a risk to our estimates. A material improvement in consumer disposable incomes, which could support consumers trading up to higher priced brands would be a welcome catalyst.
Valuation: We have revised our FY18E volume estimate from +2% to -5%, following this performance. After modelling an expected 5% price increase on average, our revenue estimate comes in flat y/y and our FY18E EPS is lowered by 18%. Consequently, we revise our TP to N143 (from N164) and maintain our HOLD recommendation. On our numbers, NB is trading on FY18E P/E of 26x.