Culled—Proshare

February 22, 2019/FBNQuest Research

Slight cuts to price target and EPS estimates

Nigerian Breweries’ (NB) Q4 2018 earnings missed our forecasts because of negative surprises in gross margin and net interest expense. The results suggest that headwinds were most pressing in 2018, as NB recorded its worst sales (-6% y/y) and PBT (-37% y/y) declines since 1998. According to management, the company suffered 4-6% volume losses caused by stronger competitive headwinds in the value lager segment (where NB has its highest exposure). 

Although double-digit volume growth was realised from NB’s premium lager segment, this did not drive overall volume growth given the segment’s lighter weighting in the brand portfolio. NB’s market share was particularly challenged by International Breweries’ (IB) expansion into the south-west. On top of this, the company’s woes were further compounded by an excise tax increase that was not passed on. Over our forecast period, we see IB’s aggressive pricing strategy, particularly in value larger, posing a key challenge to NB’s performance. That said, we highlight that: 1) NB’s management hinted that it may be forced to raise prices this year – even at the expense of volumes – to protect margins; and 2) IB’s earnings to date remain under pressure due to thinning margins and a high leverage. 

As such, we cannot rule out IB gravitating towards price hikes, which it previously shied away from. We have however not modeled these scenarios yet. Pricing aside, management pointed to an overall volume recovery in Q4, and suggested that this will extend into subsequent quarters. Our model currently incorporates a volume-driven sales growth of 3% y/y for 2019E. We have however cut our EPS forecasts by around –2% on average over the 2019-21E period, and our price target by the same percentage to N70.1. Year to date, NB shares have shed -4%, underperforming the ASI by -7%. Our new price target implies a potential downside of -15% from current levels. We retain our Underperform rating.

Decline in PBT driven by gross margin contraction

NB’s PBT for Q4 declined by -43% y/y to N6.9bn, mainly driven by a -348bp y/y contraction in gross margin. Although net interest expense was -14% lower y/y, the negatives on the topline completely offset the gains on this line. 

Sequentially, sales grew by 32% q/q, gross margin expanded by 880bps q/q, while PBT for the quarter compared favourably with a loss of –N5.1bn in Q3. Compared with our forecasts, sales missed by -3%. PBT and PAT also came in 26% and 43% behind our estimates of N9.4bn and N8.2bn respectively.