Sept 01, 2016/Cordros Research
We came away from yesterday’s conference call, with the management of NB, believing that operating performance in H2-16 would come in line with our expectation. Rising operating costs and deteriorating brand mix continue to pose threat to margins while management seeks to address these issues via (1) cost containment and importantly, (2) pricing. The inclusion of a N4 billion provision for forex losses in H2-16 – based on management confirmation that further forex losses were imminent – was the only major change we made to our estimates. Consequently, we cut 2016FY EPS estimate by 8% and TP slightly to N111.93 (previously N112.29).
On forex, revaluation of payables following the introduction of the flexible exchange rate regime was the primary driver of the N5billion loss reported in Q2-16. With the NGN now floating, (NGN closed N316 yesterday vs. N280 end-June level), and forex liquidity still a concern, we estimate N4 billion loss in H2-16, equating to N11 billion loss over 2016FY. Management indeed confirmed that NB benefitted from the CBN’s deliverable forwards that were settled in July and August. While acknowledging that the derivative initiative of the CBN has improved the way businesses react to mitigate the impact of FX, management also noted underlying risks from the illiquidity and floating of the NGN.
Notwithstanding the volume growth contraction experienced in Q2-16 (which brought growth over H1-16 slightly above H2-15 level), management disclosed that it recently increased prices by between 11-12% across 70-80% of its product portfolio. The PI, effective today, is the second this year. Although management is uncertain how this would affect market share in the immediate, it did acknowledge to have marginally lost volume to competition when PIs were taken in May (effective June). Other than flight to competition, management expects inflationary trend and purchasing power to more than influence how consumers react to the PI. We retain our 5% revenue growth estimate over 2016FY on the expectation that volume contraction (we expect would be marginal, as in Q2-16) will be more than compensated for by the PI. On brand performance, LIFE and GOLDBERG remained very strong.
The PI was necessary to offset the impact of inflated domestic and imported costs on margins. Gross margin was down 333bps y/y and 209bps q/q in Q2-16. Compared to the number (and magnitude) of PIs that have been taken this year by consumer companies in the food and beverage business, we can argue that NB has so far been conservative. Considering that costs are more likely to face further pressure over H2-16, it not unlikely that the latest PIs can at best keep margins at Q2-16 levels — which we have forecasted for 2016F. Our margin forecast also takes into consideration the impact of continued deterioration in brand mix. Management did not provide guidance for gross margin, but on prices, we certainly recall that Heineken recently guided to the need to be mindful that going forward, it does not lose ground in Nigeria.
Outstanding debt in H1-16 increased by N4 billion from end Q2 level, although it remained well below H2-15 level. Management expects debt and capex to remain conservative in the near term. On taxation, the effective rate of 18% reported in Q2-16 was one off. ETR should return to +30% in H2-16. NB’s major plants are out of pioneer tax.
