Nigerian Breweries (NB) announced a 1.0% y/y decline in Net Revenue to N235.7 billion in 9M 2019 from N238.1 billion in 9M 2018. Reported Net Revenue came in slightly below our 9M forecast of N241.7 billion. While Gross Revenue recovered, implementation of the second phase of the advalorem excise regime impacted Net Revenue significantly. On a q/q basis, the impact of seasonality weighed on Net Revenue, resulting in a 24.7% q/q decline to N65.5 billion in Q3 2019 from N86.9 billion in Q2 2019.
While we retain our Revenue and Cost of Sales estimates, we raise our forecast for Operating Expenses due to expectation of a faster uptick in Marketing & Advertising Expenses. Nigerian Breweries Revenue performance in the first nine months of the year has remained in line with our forecast for the year. Our underlying Revenue drivers (Industry sales and Market share) remain in line, thus, we leave our forecasts for the year unchanged. However, Marketing spend in 2019 has outpaced our modelled run rate, thus, we have raised our estimates for Marketing & Distribution Expenses.
We lower our target price slightly to N59.16/s from N61.60/s previously reflecting the mild downward revision on key profit lines and retain our hold recommendation. Our target price implies an upside potential of 21% on yesterday’s closing price of N49.0/s. We arrive at our target price using a combination of the DCF valuation relying on a 5-Year FCFF valuation methodology and Relative valuation which uses Forward EV/EBITDA multiples for our EM peers while applying a 60:40 weighting with the greater weighting on DCF valuation.
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 grew 43.2% y/y to N24.2 billion thus denting the modest growth in Gross Revenue. Excise duties to Gross Revenue ratio came in at 9.3% in 9M 2019 compared with 6.6% in 9M 2018. On a q/q basis, seasonality impact weighed as Net Revenue fell 24.7% q/q to N65.5bn in Q3 2019 from N86.9bn in Q2 2019.
Cost of Sales adjusted for depreciation 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. We believe NB’s weighted average inventory valuation principle helped to even out the recent surge in barley prices. The faster decline in Cost of Sales fed into gross margin, as it 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 declined 28.5% to N30.1 billion in Q3 2019 from N42.1 billion in Q2 2019.
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Operating Expenses (adjusted for depreciation) increased 6.3% y/y to N63.7 billion in 9M 2019 from N60.0 billion 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 growth in Advertising Expenses. The effect of the growth in Advertising expenses was limited by a decline in Administrative Expenses (adjusted for depreciation), which was down 18.4% y/y to N9.6bn in 9M 2019 from N11.8 billion in 9M 2018 due to reduction in staff headcount following the right-sizing exercise done last year.
On the back of higher Operating Expenses, EBITDA came in lower, down 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 seasonality effect on 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 caused a higher decline in Operating Profit, which was down 9.9% y/y to N24.4 billion for 9M 2019 from N27.1 billion in 9M 2018.
Net Finance Cost grew significantly, up 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 N0.2bn) and higher Interest Expense (up 48.6% y/y to N8.2bn). NB’s higher Interest Expense was driven by higher Interest-Bearing Liabilities (up 70.9% y/y to N72.8bn) due to the recent Commercial Paper issuance done by the company to finance working capital.
While Tax Expense declined 35.6% y/y to N4.9bn, Net Income was down 17.0% y/y to
N12.3bn in 9M 2019 from N14.8bn in 9M 2018. We note the company recorded a loss
of N1.0bn in Q3 2019 which was lower than the loss made in Q3 2018 (N3.6bn). EPS
stood at N1.53/s in 9M 2019 compared to N1.85/s in 9M 2018.
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