October 26, 2017/Cordros Research

NB released Q3-17 result earlier today. In our view, NB’s performance during the three months period was broadly disappointing. Although revenue grew 12.8% y/y, it was below our estimate by c.9%. PAT on the other hand, was down 75% y/y, and 97% below our estimate on (1) significantly weaker gross margin and (2) higher opex and net financing costs. The PAT is NB’s record low. For 9M-17 however, the strong performance in H1 held net profit up 19% relative to 9M-16. The Board proposed an interim dividend of N1.00 per share. 

Having shown consistent recovery from the trough of Q3-16, gross margin faltered in the Jul-Sep 2017 period to 34.4%, from the average of 44% achieved between Q4-16 and Q2-17, and below our 45% estimate. Compared to Q3-16 also, the recently reported margin is down 143 bps. Given largely stable prices during the period, we link the surprised margin contraction specifically to higher (1) amount (N4.1 billion; +44% q/q) recognized for NOTAP and (2) higher per hectolitre production cost, amidst pressure on key input prices (higher month-on-month Sorghum prices were recorded in key markets in July and August).

Operating expenses increased by 15.7% y/y and 1.4% q/q, and produced a margin of 30.7%, representing increases of 79 bps and 584 bps respectively. Compared to our estimate, opex margin was higher by 566 bps.

Net finance costs increased by 47% y/y, on 44% increase in finance cost and 49% decrease in finance income. We note the increase in gross debt to N28 billion as at September ending (vs. N35.5 billion in 9M-16), from N15.1 billion in H1 on the repayment of matured commercial papers. Finance income was in line while finance cost was ahead of our estimate by 8%.

Low base price continues to support y/y revenue growth while the q/q contraction signals lower sales volume. Compared to our estimate, the reported revenue was lower by 8.8%. NB’s parent company stated in a trading update released yesterday that volume declined mid single-digit in Nigeria, amidst still difficult underlying trading conditions and consumers trading down.

The shares of NB have lost 2% month-to-date. We expect investors to further exit the stock in reaction to the recent earnings underperformance. Our estimates are under review.

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