Culled—Proshare

November 11, 2016/FBNQuest Research

Underperform rating maintained despite valuation rollover
Broadly speaking, International Breweries’ underlying Q2 2017 (end Sep) results were stronger than we expected. Consequently, we have increased our EBIT forecasts for the 2017-18E period by 16% on average.

Although we have attempted to reflect a negative surprise of 68% which the company reported on its net interest line in our forecasts by increasing our finance costs estimates, this is offset by our decision to rollover our valuation to 2018. As such, we increased our price target by 15% to N16.32.

International Breweries shares have gained 22.1% this year and have outperformed the NSEASI by 30.6%. From current levels, the shares show a downside potential of -16.4% to our price target. We have retained our Underperform rating.

Pre-tax loss in Q2 2017
Q2 2017 (end-Sep) sales of N6.6bn were up 35% y/y. However, the company reported a pre-tax loss of –N216m which was primarily driven by a 372% y/y increase in net finance costs and, to a lesser extent, 6% y/y and 305% y/y increases in operating expense and other losses respectively.

Gross margin was flat y/y during the quarter. The company reported zero tax and a post-tax loss of –N216m. The losses compare with PBT and PAT of N381m and N284m respectively recorded in Q2 2016. Included in the net finance charge was an fx translation loss of –N1.3bn.

Stripping out this loss, PBT advanced by 172% y/y. This point is seen in the operating profit, which grew by 91% y/y. Sequentially, sales were down -4% q/q. The losses compare with pre-tax and post-tax losses of –N1.3bn and –N1.7bn respectively recorded in Q1 2017.

Fx challenges weighing on healthy fundamentals
Although International Breweries grew sales by 35% y/y, its results were dragged down by the impact of naira devaluation (stemming from a loan of US$25m on the company’s books). The loan is repayable in February 2017.

As such, we expect to see elevated finance charges until the company is able to refinance. Also, we do not expect International Breweries to sustain its present gross margin levels on the back of the CBN’s decision to float the naira. We estimate that the company imports about 70% of its raw materials.

The CBN’s new policy was implemented in June and saw the interbank rate move downwards by a further 10% over the Jun-Sep period, after an initial 30% as of end-June. For 2017E, we see sales and EBIT growing by 18.0% y/y and 8.4% y/y respectively.