Culled—Proshare
July 20, 2016/FBNQuest Research
15% cut to our EPS forecasts; moving rating to Underperform
We downgrade our recommendation on Nigerian Breweries (NB) to Underperform from Neutral following its Q2 2016 results which came in weaker than expected. We have also cut our EPS forecasts by around 15% on average over the 2016-18E period.
However, the cut to our price target (-25%) is greater mainly because we have increased the risk-free-rate driving our DCF by 200bps to 14.5% to reflect the uptick in FGN bond yields.
On a relative basis, NB shares are trading on a 2016E P/E multiple of 30.8x for 31% EPS growth in 2017E. These compare with the 68.7x multiple for an 18% decline in 2017E earnings that rival Guinness Nigeria is trading on. Our new price target implies a potential downside of -32% from current levels.
Weak Q2; PAT down 24% y/y…
NB Q2 2016 PAT of N8.6bn fell by -24% y/y. Although sales of N79.8bn declined marginally by -2% y/y, a combination of factors including a 9% y/y rise in opex, a 447% y/y increase in net interest expense and a gross margin contraction of -333bps y/y to 46.0% resulted in PBT declining by -36% y/y.
Further down the P&L, the y/y contraction in PAT narrowed to -24%, mainly due to a -1,297bp y/y reduction in the effective tax rate to 18.3%. Sequentially, sales were up by 3% q/q.
However, PBT and PAT fell by -30% q/q and -18% q/q respectively. Similar to the y/y trends, a -1,204bp q/q reduction in the tax rate was the major factor behind the smaller contraction in PAT q/q vs. the PBT.
The sequential declines on the PBT and PAT lines are significant because the Q2 quarter is typically the second strongest in the year after Q4. This is the first time in recent memory that Q2 earnings / PBT came in below that of Q1.
…mainly driven by fx losses
The y/y contraction in NB’s Q2 earnings was mainly due to foreign exchange losses arising from the downward movement in the naira exchange rate to c.N282.5 (vs N197.0 previously) following the CBN’s adoption of a more flexible exchange rate regime.
While the total exchange rate loss was around c.N6.5bn (US$22.6m) for H1 2016 period, we estimate that about N5.0bn of that was taken in Q2.
As a result of the weak outlook for demand, we now expect NB to deliver low-single digit (+3% y/y) sales growth in 2016E. We also expect more volatility in the naira exchange rate through the year to have a negative impact on earnings. As such, we see 2016E EPS declining by 6% y/y to N4.39.
