Culled—Proshare

November 22, 2016/FBNQuest Research

PT unchanged despite 7% average cut to our EPS forecasts
Following Nigerian Breweries’ (NB) Q3 2016 results which surprised negatively, we have cut our EPS forecasts by around 7% on average over the 2017-18E period. Despite the cuts to our EPS forecasts, our price target of N92.2 is unchanged because we have cut our capex forecasts for the 2017-18E period by an average of 24% to reflect the slowdown in capital investments by consumer goods companies.

NB shares have outperformed the index ytd, gaining +3.7% vs. the ASI’s -11.0%. At current levels, the shares are trading on a 2016E P/E multiple of 43.3x (for 54% EPS growth in 2017E) or at a 53% premium to the 28.3x multiple implied by our price target. Our new price target implies a potential downside of -35% from current levels. As such, we retain our Underperform rating on the shares.

Q3 PBT down 66% y/y driven by marked contraction in gross margin
Nigerian Breweries (NB) Q3 results showed that both PBT and PAT fell by -66% y/y and -78% y/y to N2.2bn and N1.0bn respectively, the worst set of results in recent times. Although the marked decline in profitability was mainly driven by a gross margin contraction of-639bps y/y to 35.8%, a 9% y/y rise in opex also contributed.

The negatives on these lines more than offset the low-single-digit (+3% y/y) growth in sales. On a sequential basis, while sales declined by 18% q/q, PBT and PAT fell by much wider margins of 79% q/q and 88% q/q respectively. Compared with our forecasts, sales were in-line  with our N64.8bn estimate. However, PBT and PAT missed by -66% and -77% respectively due to a negative surprise (-1,036bps) in gross margin.

Gross margin weakness down to spike in input costs
Unlike in Q2 2016 when a N6.5bn exchange rate loss was the primary driver behind the y/y decline in PBT, Q3 earnings were weighed down by a y/y contraction in gross margin due to a spike in raw material costs.

We estimate that the cost of raw materials and consumables increased by about 21% y/y in Q3 2016. We believe this spike was largely attributable to the cost of imported inputs which account for over 60% of NB’s raw materials.

On our estimates, fx related losses in Q3 were only around N400m. Going forward, although we still expect NB to deliver single digit sales growth (+3% y/y) in 2016E, we forecast a -30% y/y decline in EPS to N3.26.