Culled—-Proshare

August 15, 2016/FBNQuest Research

Downward revision to estimates; downgrading to Underperform
International Breweries’ Q1 2017 (end June) earnings came in significantly behind our estimates. As such, we have cut our earnings estimate over the 2017-18E period by 48% on average.

Due to the higher interest rate environment, we increased our risk free rate assumption by 200bps to 14.5%. Consequently, we have cut our price target by 34.2% to N14.18. International Breweries shares are trading on a 2017E P/E multiple of 22.4x for an adjusted EPS decline of -4.1% y/y in 2018E.

The shares have appreciated by +8.8% (NSEASI: -1.8%) since the announcement of its Q1 2017 numbers. We believe the rally of recent is overdone. As such, we are downgrading our recommendation on the stock to Underperform from Neutral. The shares show a downside potential of -29.1% to our N14.18 price target.

Positive revenue outlook weighed down by FX challenges
International Breweries’ Q1 2017 results were weighed down by a foreign currency translation loss of N2.7bn. The fx loss was due to a US$ denominated loan of US$25m which matures in February 2017.

Due to the scarcity of fx and the continued naira depreciation, we expect the company to continue to incur further fx translations losses. In addition, we estimate that International Breweries imports about 60-65% of its raw materials. As such, given the fx challenges, we do not believe that the company’s current gross margin levels (Q1 2017 – 49.6%) are sustainable.

In 2017E, while we see sales growing by 11% y/y (on the back of the company’s value brand niche which is growing due to the squeeze on household wallets), we expect EPS to decline by -97% y/y (adjusted EPS growth of 11.1% y/y), having factored in the fx loss in Q1.

Pre-tax and post-tax losses in Q1 2017
Q1 2017 (end-Jun) 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.

If finance costs had been in line with our estimates i.e. normalised levels, PBT and PAT growth would have been around 70% y/y on average. This can be seen in the operating profit of N1.6bn being up 85% y/y.