August 2, 2018/InvestmentOne Report

Mixed topline performance: up 8.11% q/q, down 0.03% y/y.

·         Contracted gross profit margin: down 339bps q/q, 300bps y/y.

·         Higher opex/sales ratio: up 232bps q/q, up 230bps y/y.

·         Declining Profit before tax: down 19.34% q/q, down 33.18% y/y. 

Nigerian Breweries Plc’s published Q2 2018 results were largely reflective of weak consumer spending, input cost pressure and increased competition, which pressured bottom line performance. 

PBT margin declined by 481bps y/y to 13.71%, following the 300bps y/y contraction in gross profit margin and 230bps y/y increase in opex/sales ratio, which outweighed the 52.72% y/y decline in net finance cost. 

We highlight that Nigerian Breweries Q2 2018 topline performance was largely in line with our forecast of N89.08billion, although PBT performance came in lower than our expectation on the back of lower gross profit margin performance. 

Weaker Volume On Competitive Pressure 

Nigerian Breweries topline came in flat y/y in Q2 2018 at N89.69billion. The uninspiring topline performance was largely expected, given the increased competition in the sector. Although the premium segment of the company’s brand recorded double digit growth in Q2 2018, overall, volume declined due to the weak consumer spending and competitive pressure both in the beer and malt segment as highlighted by Heineken, the parent company. 

While Heineken in its recent conference call pointed to the fact that Nigerian Breweries took price increases to cover for the impact of excise tax on margin performance, recently, the company guided towards the reversal of price increases on some of its value brands. This could be an indication that the previous price increases, on the back of excise tax to protect margin, negatively impacted on its volume growth. The impact of the company’s price hike on volume may have been worsened by the fact that some of its closest competitors maintained fairly stable price levels. 

Higher Opex To Drive Volume 

Although Nigerian Breweries’ opex/sales ratio came in better than that of International Breweries Plc (31.38% in Q2 2018), it was however higher on a q/q and y/y basis by 232bps and 230bps respectively to 27.12% in Q2 2018. The increase in operating expense, both on a q/q and y/y basis, was solely driven by the rise in marketing and distribution expense, which is somewhat similar to International Breweries.  

We suspect the increased spending on marketing and distribution may be reflective of the company’s drive to grow volume amidst increased competition. This, coupled with lackluster gross margin performance, drove operating margin down by 442bps q/q and 687bps y/y to 15.56% in Q2 2018.

Silver Lining: Lower Net Finance Cost

Net finance cost declined by 31.57% q/q and 52.72% y/y to N1.65billion in Q2 2018. This was supported 380.80% q/q and 357.72% y/y increase in finance income to N182million coupled with the 25.21% and 48.11% reduction in finance cost on a q/q and y/y basis respectively.  

Cash Conversion Ratio, A Source of Concern 

This said, although the company continues to support its working capital through its N100billion Commercial Paper programme launched in 2015, its ability to convert its operations to cash remains a potential source of concern as the cash conversion ratio declined to 6.34% in H1 2018, from 60.26% in H1 2017. This was majorly driven by the 67% y/y increase in trade receivables and the massive pay back of N27.31billion for trade payables in H1 2018.    

Going forward, we are of the view that improved consumer spending in H2 2018, on the back of government expansionary fiscal policy, election spending and potential review of minimum wage, may bode well for topline performance.  

However, topline growth may be moderated given the intense competition in the brewery space as International Breweries Plc expands it brewery operations in H2 2018. Furthermore, the recent guidance by the company to reverse the price increases taken on some of its value brand may negatively impact on gross margin and bottom line performance. 

While our pricing model is under review, we currently have a SELL rating for the stock at a target price of N111.8. 

   Source: Company financials, Investment One Research