Quick Take: Seasonality and high leverage weigh on earnings

Nigerian Breweries’ (NB) in its recently released 9M 2019 financials reported marginal 1.0% y/y decline in Net Revenue (Gross Revenue less excise duty payments) to N235.7 billion from N238.1 billion in 9M 2018. Reported Net Revenue came in slightly below our 9M forecast of N241.7 billion. The decline in Net Revenue was due to increase in excise duties following implementation of the second phase of the advalorem excise duty system. Gross Revenue was higher by 1.9% y/y, but excise payments surged 43.2% y/y to N24.2 billion thus denting the modest growth in Gross Revenue. Excise to Gross Revenue ratio came in at 9.3% in 9M 2019 as against 6.6% in 9M 2018. On a q/q basis, seasonal impacts weighed as Net Revenue fell 24.7% q/q to N65.5 billion in Q3 2019 from N86.9 billion in Q2 2019.

Cost of Sales adjusted for depreciation, however, fell 3.8% y/y to N123.1 billion in 9M 2019 from N127.9 billion in 9M 2018. The decline in Cost of Sales was driven by a 4.4% y/y decline in raw materials cost despite high price environment for raw materials like barley. The faster decline in Cost of Sales fed into improved gross margin which strengthened 1.5ppts to 47.8% as at 9M 2019. Gross Profit edged higher by 2.2% y/y to N112.6 billion in 9M 2019 from N110.2 billion in 9M 2018. On a q/q basis, Gross Profit fell 28.5% to N30.1 billion in Q3 2019 from N42.1 billion in Q2 2019.

[READ MORE: Quick take: 9M earnings impressive despite weak Q3 performance]

Operating Expenses (adjusted for depreciation) climbed higher by 6.3% y/y to N63.7 billion in 9M 2019 from N60.0bn in 9M 2018. The rise in Operating Expenses was driven by a 12.3% y/y rise in Marketing & Distribution Expenses (adjusted for depreciation) to N54.1bn in 9M 2019. We believe the increase in Marketing & Distribution costs was largely due to NB’s drive to reclaim lost market share amidst intense competition evidenced in the 21.7% y/y climb in Advertising Expenses. The effect of growth in Advert expenses was tempered by a decline in Administrative Expenses (adjusted for depreciation), which recorded a double-digit decline of 18.4% y/y to N9.6 billion in 9M 2019 from N11.8 billion in 9M 2018 due to reduction in staff headcount following the right-sizing exercise done last year.

Against the backdrop of higher Operating Expenses, EBITDA edged lower by 2.7% y/y to N48.9 billion in 9M 2019 from N50.3 billion in 9M 2018. In Q3, EBITDA fell 63.6% q/q to N6.7 billion due to lower gross profits occasioned by the seasonal effect of smaller Revenue. EBITDA margin slipped lower by 0.4ppts y/y to 20.7% in 9M 2019 from 21.1% in 9M 2018. A 5.7% rise in Depreciation & Amortisation Charge accelerated the decline in Operating Profit, falling 9.9% y/y to N24.4bn for 9M 2019 from N27.1 billion in 9M 2018.

Net Finance Cost jumped 51.0% y/y to N8.0 billion in 9M 2019 from N5.3 billion in 9M 2018 on the back of lower Interest Income (down 4.2% y/y to N0.2 billion) and higher Interest Expense (up 48.6% y/y to N8.2 billion). NB’s higher Interest Expense was driven by higher Interest-Bearing Liabilities (up 70.9% y/y to N72.8 billion) due to the recent Commercial Paper issuances done by the company to finance working capital.

[READ ALSO: Quick Take: Lower revenue & higher leverage underpins weak operating performance]

While Tax Expense declined 35.6% y/y to N4.9 billion, Net income slumped 17.0% y/y to N12.3 billion in 9M 2019 from N14.8 billion in 9M 2018. We note the company recorded a loss of N1.0 billion in Q3 2019 which was lower than the loss made in Q3 2018 (N3.6 billion). EPS stood at N1.53/s in 9M 2019 compared to N1.85/s in 9M 2018. On an annualised basis, EPS is lagging our full-year estimate (Annualised actual – N2.05 vs CSL Estimate – N2.60). However, we note that festivities in Q4 would see the company record stronger Earnings which should bring EPS closer to our estimate. The company declared a dividend of N0.50/s which translates to a dividend yield of 1.1% based on Friday’s closing price of N46.05/share.

We have a target price of N61.60 for Nigerian breweries with a HOLD recommendation on the stock.

______________________________________________________________________

CSL STOCKBROKERS LIMITED CSL Stockbrokers,

Member of the Nigerian Stock Exchange,

First City Plaza, 44 Marina,

PO Box 9117,

Lagos State,

NIGERIA.