Culled—-Proshare
August 4, 2016/FBNQuest Research
Event: International Breweries reports Q1 2017 (end-Jun) results
Implications: Downward revisions to consensus estimates expected
Positives: Sales of N6.9bn were up 32% y/y
Negatives: Pre-tax and post-tax losses of –N1.3bn and –N1.7bn respectively
This morning, the NSE published International Breweries’ Q1 2017 (end-Jun) results which showed that sales of N6.9bn were up 32% y/y. However, the company recorded pre-tax and post-tax losses of –N1.3bn and –N1.7bn respectively.
The strong y/y sales growth was offset by a N2.9bn net finance charge (vs. N251m in Q1 2016 and N598m in Q4 2016) and, to a lesser extent, a 7% y/y increase in operating expenses. Assuming finance costs were in line with our estimates and with the company’s normalised levels, PBT and PAT growth would have been higher by around 70% y/y on average. This can be seen in the operating profit of N1.6bn being up 85% y/y.
The high net interest charge was due to fx challenges following the adoption of the CBN’s new flexible exchange rate regime and the naira’s downward move to c.N280 per US$ from around N199 previously. The company has a US$ denominated loan of US$25m on its books which is repayable in February 2017.
Sequentially, sales were flattish q/q. The pre-tax and post-tax losses compare with PBT and PAT of N1.3bn and N943m respectively recorded in Q4 2016.
Compared with our estimates, sales were ahead by 13% while PBT and PAT were significantly behind. The variance in PBT and PAT (versus our estimates) was mainly due to the net finance expense line.
Moving beyond the company’s foreign currency exposure, the company’s underlying numbers were satisfactory. We suspect that the strong y/y sales growth was due to consumers downtrading to cheaper brands – a segment International Breweries operates in – as a result of the squeeze on household wallets.
In addition, our channel checks indicate that the company’s flagship brand, Trophy, is gaining traction in Lagos State. Initially, the company’s distribution reach was limited to the South-West region (ex-Lagos state) of the country but it has expanded distribution to Lagos State recently.
On gross margins, despite the unfavorable macroeconomic environment and fx challenges, Q2 gross margins contracted by a modest -28bps y/y. The gross margin of 49.6% came in ahead of our estimates by 361bps.
It appears that the company may have adopted some strategies to mitigate the negative impact arising from the unfavorable fx rate.
Our weaker gross margin estimate tried to capture the fact that the company imports a sizable amount of its raw materials. We seek management guidance on the sustainability of this performance.
Year-to-date, International Breweries shares have gained +21%, significantly outperforming the broad index which has shed -3.4%. On the back of these numbers (especially the negative hit due to foreign currency exposure), we expect a sell-off in the shares.
Once the market gets over the fx-related negatives in the Q1 results, we expect the shares to recover some lost ground given that the fundamentals continue to look healthy.
We rate the stock Neutral. Our estimates are under review.
International Breweries’ Q1 2017 (end-Jun) results vs. FBNQuest estimates
