February 21, 2019/InvestmentOne Report

·         Diverse topline performance: up 32.0% q/q, down 3.9% y/y.

·         Mixed gross profit margin: up 880bps q/q, down 348bps y/y.

·         Mixed opex/sales ratio: down 788bps q/q, up 240bps y/y.

·         Profit before tax of N6.95billion in Q4 2018 against a Loss before tax of N5.07billion and a Profit Before Tax of N12.20billion in Q4 2017. 

Last week, the beer giant, Nigerian Breweries (NB) Plc, reported its Q4 2018 scorecard which continued to reflect weak consumer spending, heightened competition and the negative impact of the introduced excise duties on margin and bottomline performance in general.   

Consequently, PBT margin declined 553bps y/y to 8.05%, following the 348bps y/y reduction in gross profit margin and 240bps y/y increase in opex/sales which more than outweighed the 13.7% y/y decrease in net finance cost and the 17.4% y/y rise in other income.  

Topline Performance Remained Weak 

Similar to the previous quarter, NB’s published Q4 2018 topline performance declined by 3.9% y/y to N86.32billion. The reduction in topline may have been driven by intensified competition in the brewery space as well as weak consumer spending, which may have negatively impacted on sales volume. According to Heineken, its parent company, beer volume was said to remain weak in Nigeria having decreased mid-single digit in FY 2018 compared to FY 2017. Following International Breweries capacity expansion and increased representation in the beer segment, NB has continued to contend with market share forcing it to reverse price increases taken on some of its brands, particularly on its Life and Goldberg brands sometime in July 2018. We believe NB may have absorbed part of the cost associated with the implemented excise duties in order to remain competitive. This, combined with input cost pressures, may have contributed to the 348bps y/y contraction in gross profit margin to 37.3% recorded in the quarter. 

However, on a sequential basis, topline was up by 32.0%, largely due to seasonality. Also, we observed 880bps q/q improvement in gross profit margin, suggesting reduced cost pressures on a q/q basis. We suspect the improvement in agricultural GDP in Q4 2018 which printed at 2.46% y/y (vs 1.91 y/y in Q3 2018) may have supported the moderation in input cost thereby supporting the published expansion in q/q gross profit margin. 

Higher Opex/Sales Ratio 

Despite the 34.2% y/y decline in administration expenses to N4.60billion, opex/sales ratio was up 240bps y/y to 26.9% largely due to the 24.0% y/y spike in marketing and distribution expenses as well as lower y/y topline performance. The rise in marketing and distribution expenses evidences the drive of NB to grow volume amidst the increased competitiveness in the brewery space. This may have informed the need for more promotional campaigns aimed at increasing customer awareness of products availability. 

On a q/q basis, although operating expenses were up 2.1% q/q to N23.21billion, opex/sales ratio declined 788bps q/q majorly on the back of higher topline performance compared to the previous quarter. 

Silver Lining: Lower Net Finance Cost

Although total debt outstanding rose y/y, NB’s finance cost in Q4 2018 declined by 10.6% y/y to N2.39billion. This, combined with the 160.3% y/y increase in finance income to N123million, supported the 13.7% y/y decline in net finance cost to N2.26billion.  

On a sequential basis, net finance cost increased by 88.6% q/q as the 554.7% q/q rise in finance income to N123million was overshadowed by the 95.8% q/q surge in finance cost to N2.39billion.  

Cash Conversion Ratio, A Source of Concern 

Although NB’s working capital may continue to see support from its revolving credit facilities with five Nigerian banks, with an approved limit of N6.00billion to N15.00billion with each of the banks, its ability to convert its operations to cash remains a potential source of concern as the cash conversion ratio declined to 44.5% in FY 2018, from 78.9% in FY 2017. This was majorly driven y/y increase in trade and other receivables as well as y/y repayment of its trade payables.  

In the near term, we expect consumer spending to see improvement from election spending, implementation of the potential review in the minimum wage as well as faster execution of the 2018 budget, which may bode well for topline performance. 

However, topline growth may continue to be moderated by intense competition, especially from International Breweries Plc. Furthermore, margin may remain pressured as NB may lean towards absorbing further excise tax increases in its bid to remain competitive. 

Our pricing model is under review. 

Source: Company financials, Investment One Research