On July 2nd, International Breweries Plc (IntBrew) released its Q1 2019 results which presented the opportunity to compare the company’s post-merger performance. Revenue grew 35.2% y/y to N35.1bn in Q1 2019 from N26.0bn in Q1 2018. International Breweries Revenue surge evidences the company’s success in undercutting competitors market share with NB recording muted Revenue growth of 0.4% in the same period while Guinness saw Revenue dip 17.3%.
IntBrew continues to maintain its strategy of providing mainstream brands Trophy and Hero at discounted prices to consumers. Cost of sales (adjusted for depreciation) grew 38.4% y/y to N18.0bn in Q1 2019 from N13.0bn in Q1 2018. Gross margin was pressured lower, down 1.2ppts y/y to 48.6% (NB – 49.0%) due to faster growth in cost of sales. Nevertheless, Gross profit climbed higher by 31.9% y/y to N17.0bn in Q1 2019 from N12.9bn in Q1 2018.
A spike in Operating Expenses placed further pressures on margins as Marketing and Promotion Expenses jumped 63.9% y/y to N7.7bn in Q1 2019 from N4.7bn in Q1 2018 while Administrative Expenses (adjusted for depreciation) climbed 11.2% y/y to N3.3bn in Q1 2019 from N3.0bn in Q1 2018.
We observed that IntBrew has embarked on aggressive brand promotion in 2019, notably signing promotion deals with key celebrities as well as hosting multiple events across the country. Our view is further supported by a 79.2% spike in the Advertising & Promotion Expense component of Marketing & Promotion Expenses. Consequently, EBITDA margin dipped 3.0ppts to 17.3% in Q1 2019 while EBITDA climbed 15.2% y/y to N6.1bn in Q1 2019 from N5.3bn in Q1 2018.
Furthermore, IntBrew booked heavy Depreciation Expense climbing 51.0% y/y to N6.0bn in Q1 2019 from N3.9bn in Q1 2018. We note the jump in Depreciation Expense is down to the initiation of depreciation charge on Property, Plant & Equipment associated with the opening of the Sagamu plant.
These assets were previously classified as Assets in Progress and were not depreciated until Q4 2018. Against this backdrop, IntBrew booked a Loss before Interest & Tax of N233.0m in Q1 2019 against a profit of N1.0bn in Q1 2018.
International Breweries bloated debt book continues to pressure earnings with Finance cost surging 41.1% y/y to N5.1bn in Q1 2019 from N3.6bn in Q1 2018. We note International Breweries increased its debt book as the company took the additional debt of N8.7bn as revealed in the cashflow statement.
The company’s debt/equity ratio now stands at a precarious 7.2x while its total borrowings come to N224.8bn. Consequently, loss before tax worsened to N5.3bn in Q1 2019 from N2.6bn in Q1 2018 while a tax credit of N1.3bn helped cushion loss after tax to N4.0 billion.
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We previously stated that the major cause of International Breweries poor performance has been its bloated debt book. Q1 2019 performance shows no sign of International Breweries deleveraging its balance sheet as no borrowings were repaid during the period while the company took on more debt.
In what represents a new concern, IntBrew’s aggressive brand promotion which has seen it incur more Marketing cost will continue to drag performance in the short to medium term. The company’s recent BudX campaigns evidence the company’s tilt at aggressively promoting its brands particularly the Budweiser Premium beer as it attempts to fight for market share in the Premium beer market.
We have a target price of N20.40/s on the stock with a SELL recommendation.
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