Culled—Proshare
October 26, 2017/FBNQuest Research
Event: Nigerian Breweries reports Q3 2017 results
Implications: Downward revisions to consensus FY 2017 PBT forecast likely
Positives: Sales grew by 13% y/y, though expected
Negatives: PBT and PAT declined by -84% y/y and -75% y/y respectively
Earlier this morning, Nigerian Breweries (NB) published its Q3 2017 results which surprised negatively. Sales of N73.7bn grew by 13% y/y while PBT and PAT declined by -84% y/y and -75% y/y to N369m and N260m respectively. The y/y sales growth was completely offset by a combination of factors: 1) a -143bp y/y contraction in gross margin to 34.4% 2) a 16% y/y rise in operating expenses and 3) a 47% y/y growth in net finance costs. These negatives led to the significant y/y PBT decline. PAT declined by a softer margin due to a lower tax rate of 30% vs. a tax rate of 53% in the corresponding quarter of 2016.
On a sequential basis, sales were down -18% q/q while PBT and PAT both declined by 98% q/q. The q/q sales decline is not surprising because of seasonality trends. The end-Sep quarter is usually one of the weaker quarters for the brewers. In addition to the q/q sales decline, Q3 gross margin contracted by -1,103bps q/q and completely offset a 25% q/q decline in net finance costs, leading to the weak bottom line. Compared with our estimates, Q3 sales were in line. However, PBT and PAT missed significantly, mainly due to negative surprises on the gross margin, operating expenses and net finance costs lines.
On a 9M basis, sales of N254.7bn advanced by 14% y/y. PBT and PAT of N34.4bn and N24.0bn grew by 24% y/y and 19% y/y respectively. 9M gross margins contracted by -184bps y/y and operating expenses grew by 11% y/y. However, these were not strong enough to offset the y/y sales growth and a -23% y/y decline in net finance costs, leading to the PBT growth. On an annualised basis, 9M sales are tracking behind consensus’ FY estimate of N361bn by 6%. PBT and PAT are behind by 28% on average.
Despite the CBN’s intervention in the fx market through the NAFEX window, surprisingly, NB was not able to expand gross margins during the quarter. Just as we were beginning to buy into the come-back story of the brewers following a series of promising results reported in the last few quarters, this set of numbers and Heineken (NB’s parent’s) comments on NB’s challenges sourcing fx have come as a surprise to us. We await clarification on this. Heineken’s comments regarding mid single-digit volume declines were expected; however, we expected price increases to more than compensate as we have seen in previous quarters.
On the back of these results, we expect to see downward revisions to consensus FY 2017 PBT forecast. NB shares have gained just 4% this year and have underperformed the broad index and the sector by -32% and -67% respectively.
Although NB declared an interim dividend of N1.00 per share (implying a yield of 0.6% and a payout ratio of 33%), we expect the market’s reaction to be negative.
We rate the shares Underperform. Our estimates are under review.
Nigerian Breweries Q3 2017 results: actual vs. FBNQuest Research estimates (N millions)
| Q3 2017 | 9M 2017 | ||||||||
| Actual | Y/y | Q/q | FBNQuest est. | Act. vs FBNQuest est (%) | Actual | Y/y | FBNQuest est. | Act. vs FBNQuest est (%) | |
| Sales | 73,680 | 12.8% | -17.9% | 73,838 | -0.2% | 254,690 | 14.4% | 254,848 | -0.1% |
| Cost of sales | -48,324 | 15.3% | -1.3% | -42,826 | 12.8% | -148,000 | 18.1% | -142,502 | 3.9% |
| Gross profit | 25,356 | 8.3% | -37.8% | 31,012 | -18.2% | 106,690 | 9.5% | 112,346 | -5.0% |
| -Gross margin | 34.4% | -143bps | -1103bps | 42.0% | -759bps | 41.9% | -184bps | 44.1% | -219bps |
| Dist. and admin. exp | -22,589 | 15.7% | 1.4% | -21,413 | 5.5% | -66,424 | 11.0% | -65,248 | 1.8% |
| Operating profit | 2,767 | -29.0% | -85.0% | 9,599 | -71.2% | 40,266 | 7.2% | 47,098 | -14.5% |
| Other income | 212 | 79.5% | -86.8% | 353 | -39.8% | 2,031 | 404.8% | 2,171 | -6.5% |
| Net interest expense | -2,610 | 47.4% | -25.3% | -2,433 | 7.3% | -7,869 | -22.6% | -7,692 | 2.3% |
| Net gain/ loss on fx | 0 | n/a | n/a | 0 | n/a | 0 | n/a | 0 | n/a |
| PBT | 369 | -83.6% | -97.8% | 7,519 | -95.1% | 34,428 | 23.9% | 41,578 | -17.2% |
| -PBT margin | 0.5% | -294bps | -1802bps | 10.2% | -968bps | 13.5% | 104bps | 16.3% | -280bps |
| Tax | -109 | -90.9% | -97.5% | -2,256 | -95.2% | -10,417 | 35.6% | -12,563 | -17.1% |
| -Tax rate | 29.6% | -2390bps | 363bps | 30.0% | -40bps | 30.3% | 261bps | 30.2% | 4bps |
| PAT | 260 | -75.1% | -97.9% | 5,263 | -95.1% | 24,011 | 19.4% | 29,014 | -17.2% |
| – PAT margin | 0.4% | -125bps | -1336bps | 7.1% | -678bps | 9.4% | 40bps | 11.4% | -196bps |
Source: NSE; FBNQuest Estimates
