November 7, 2018/InvestmentOne Report

Improved topline growth : up 11.4% q/q, 58.1% y/y. 

·         Lower gross profit: down to 32.7% in Q3 2018 from 35.7% and 43.2% in Q2 2018 and Q3 2017 respectively . 

·         Moderated opex/sales ratio: down 35bps q/q, 953bps y/y. 

·         Loss before tax of N3.95billion in Q3 2018 against a loss before tax of N2.69billion and N3.48billion in Q2 2018 and Q3 2017 respectively . 

International Breweries Plc released its Q3 2018 results last week. While we observed an improvement in topline growth relative to Q2 2018, lower gross profit margin and higher interest expense continued to exact downward pressure on bottom line performance. 

This said, the company recorded a loss before tax of N3.95billion, following the 15.3% q/q increase in net finance cost and 304bps q/q contraction in gross profit margin, which offset the double digit topline growth recorded in the quarter. 

Capacity Expansion Supported Volume Growth 

Compared to Nigerian Breweries and Guinness, who published 27% q/q and 25% q/q decline in topline in their recently released results, International breweries Plc recorded a stellar 11% growth in topline in the same period. We suspect the double digit growth in topline was more volume driven as management guided to keep the prices of some of its value brands unchanged, specifically Hero and Trophy lager, despite the increase in excise tax on alcoholic and non-alcoholic beverages. Furthermore, the recently inaugurated Sagamu plant in August 2018 may have supported increased beer production, which may have also been a major factor that contributed to improved topline performance in the quarter. 

However, gross profit margin remains pressured as management’s decision to partly absorb the excise tax implemented in June continued to keep production cost on the high. This is a trend we have observed across the brewery space as Nigerian Breweries and Guinness both registered 1,395bps q/q and 236bps q/q contraction in gross profit margin respectively in similar period. We suspect this may have been largely motivated by the quest to remain competitive due to rising competition in the brewery space vis-à-vis weak consumer spending. 

Finance Expense Weighed On Bottom line 

Although opex/sales ratio came in relatively flat q/q, printing at 31.0%, International Breweries recorded a loss before tax of N3.95billion. The loss before tax was partly driven by the 15.2% q/q increase in finance cost to N4.07billion. Specifically, the rise in finance cost was largely driven by the 92.0% q/q increase in foreign exchange loss to N945.31million while interest paid in the quarter registered a meager 2.74% q/q increase to N3.12billion. Although management hinted that improving the company’s debt position remains a key focus in 2018, we are yet to see that reflect in its financials as the company’s total loan outstanding continued to be on the rise, increasing by N27.28billion in Q3 2018.   

While the increase in total loan outstanding may have been necessitated by the need to finance capex, this has continued to impact negatively on the company’s interest coverage and debt to equity ratio. On a q/q basis, the company’s interest coverage ratio worsened to 0.12x in Q3 2018 from 0.31x in Q2 2018 while its debt to equity ratio increased to 574.6% in Q3 2018 from 443.2% in Q2 2018. 

In the near term, we are of the view that the company’s topline performance may be supported by government’s expansionary fiscal policy, election spending and the just approved increase in the minimum wage. We also highlight that the recently commissioned Sagamu plant may be positive for topline performance. However, topline growth may remain moderated by competition as brewers contend for market share through product innovation and marketing. Furthermore, the decision by the firm to keep the prices of some of its value brands unchanged may pressure margin as this, combined with high interest expense may continue to weigh on bottom line performance.  

Our pricing models are currently under review. 

Source: Company financials, Investment One Research