August 30, 2016/InvestmentOne Research
Maintaining sell rating on Nigerian Breweries Plc
NB’s Q2 2016 results showed moderation in sales and a spike in net finance cost which weighed on bottom-line performance. Relative to our estimate, sales was down by over -4% y/y while PBT declined by -29% y/y, due largely to spike in net finance cost.
Following from these numbers, we have reviewed downward our EPS forecast for the top brewer by over 15%. We have also modelled an average sales growth of +4.6% over 2016-2017E given the continued squeeze on consumers’ disposable income. Consequently, we have obtained a new target price of N94.50k which offers a -31.66% downside from current levels.
The cut in our TP was largely driven by a risk-free rate of 15% reviewed upward by 200bps due to spike in yield on FGN bonds. NB’s currently trades at a 2016 P/E multiple of 26.67x for an EPS growth of -14.23x in 2016 compared to sector average PE multiple of 25.97x and EPS growth of -54.20x.
Q2 PBT fell by over 30% y/y
Recently released Nigerian Breweries Plc results showed that PBT and PAT declined by over -36% and -24% to c.N10bn and N8bn respectively, weighed on largely by a +447% y/y jump in interest expense to N5.4bn. Though sales declined by 2% y/y, gross margin also contracted by 209bps, reflecting the impact of higher input costs. Moving down the P& L, line a 1200bps decline in tax burden rescued further slump in PAT.
As such, PAT margin of 10.16% came in lower by 269bps, compared to over 600bps contraction in PBT margin. On a sequential basis, the result showed a meagre +2.92% uptick in turnover while both PBT and PAT were down by -29.8% and -17.6% driven by contraction in PBT and PAT margin by over -600bps and -200bps respectively.
Exchange loss weighs on finance expense
We highlight the impact of the exchange rate pass-through on finance expense as one of the key drivers of NB’s Q2 2016 numbers. In the period ended June 2016, finance expense rose to N8.4bn from N2.9bn in June 2015. This translated to over N5bn upsurge in finance expense; part of this was driven by the c.30% post devaluation loss in Naira value.
Going forward, while we see continued support to performance from its brownfield acquisition of value brand products as well as its recent product innovation, we highlight that macro headwinds (rising inflation, squeeze in disposable income and volatility in Naira value among others) may continue to drag performance in the near term. However, over the medium to longer term NB remains our core preference in the breweries sector given its strategic positioning in the industry.
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