August 1, 2018/Cordros Capital
Update: NB reported 33.1% y/y decline in Q2-18 EPS, impacted by sales and gross margin declines, as well as higher effective tax rate, which offset a significantly lower net finance cost. Both the achieved revenue and net profit trailed our estimates for the three months period by 6% and 39% respectively. And annualized, the H1-18 EPS of NGN2.31 is 8% behind consensus estimate for 2018E.
Competition, seasonality, and price hike impact revenue: The reported Q2-18 revenue was less than Q2-17 by 0.03% and trailed our estimate by a wider margin. NB has now recorded y/y decline in revenue for three quarters in a row. At current run-rate (-5% in H1-18), and considering sales is typically slower in H2, we no longer expect NB to grow revenue in the 2018 fiscal year. Our revised revenue estimate of NGN337.7 billion is lower by 2% (vs. +7% previously) compared to 2017FY. And we also expect a downward revision of consensus’ estimate of NGN362.2 billion (+5% vs. 2017FY) following the latest result. Heineken (NB’s parent) had guided in May to declining sales volume in Nigeria. On one hand, we believe unit volume was affected by Ramadan-related decline in beer consumption. But more broadly, we reiterate that NB’s market share is under pressure from the growing presence of competition – INTBREW (not covered) specifically – in the West and East markets. We should also mention the price hike in early June as possibly impacting volume.
A concerned margins contraction: Q2-18 gross margin came in at 42.4%, down by about 300 bps y/y and q/q, and at strong variance to the 46.4% rate we expected. Our assumption is that NB may have absorbed the additional costs associated with the newly approved excise duties for alcoholic beverages, effective June. For instance, we are aware that NB increased the prices of beer earlier in June (Star Radler, Life, Gulder, and Goldberg), but rolled some back by the end of the month. While we expect NB will eventually pass on the extra costs to consumers, we expect it will be measured and staggered, amidst increasing competition for market share (for instance, we understand INTBREW retained the prices of its product after the new excise duties took effect). Consequently, we revise our gross margin estimate for 2018E 150 bps lower to 41.5%, while retaining estimates over 2019-2020E at 43% average.
The Q2-18 result shows EBITDA and EBIT were lower by 20% y/y and 31% y/y respectively, with 24% (-606 bps) and 16% (-686 bps) margins. Both opex and the margin were higher than our estimates. Overall, we forecast EBITDA and EBIT to contract by 6% each in 2018E, with 25.2% (vs. 26.5% in 2017FY) and 15.8% (vs. 16.6% in 2017FY) margins respectively.
Significantly lower net finance costs: Net finance cost of NGN1.7 billion was recorded in Q2-18, 53% lower y/y, comprising 356% y/y increase in finance income and 48% reduction in finance costs. On finance costs, we note that the balance of borrowings is little changed compared to Q1-18 (+4%) and doubles Q2-17’s, suggesting that the strong double-digit decline is achieved on the back of stable FX.
Estimate and valuation: The net impact of the changes to our model is a cut to our 2018E EPS estimate to NGN3.89 (from NGN4.94 previously) and TP to NGN93.14 (previously NGN107.25), with HOLD rating. NB’s stock has lost 19% since we updated on Q1-18 result, with a SELL recommendation. On our estimates, the stock is trading at forward (2018E) P/E and EV/EBITDA multiples of 27x and 10.1x, a discount to its five-year historical averages of 30.1x and 12.2x respectively.
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