March 6, 2019/Cordros Report

Update: We update on NB following 2018FY investors/analysts call. We expect net earnings to decline further in 2019E on intense competition (INTBREW; GUINNESS), a further increase in excise duty, and still-weak consumer demand environment. We forecast c.3.6% net revenue decline, flattish gross margin, and 15.2% EBITDA and 27.9% net profit declines respectively.

Volume growth to remain subdued in 2019FY: We expect volume growth to remain depressed in 2019 given cautious macro outlook, amidst a still pressured consumer wallet and a more intense competitive environment. Although a bright spot for volume exists in the premium segment leveraging Heineken, we expect the depression in the economy (the new mainstream) segment will continue for the next 2-3 years. On the whole, we revise our 2019E net revenue forecast lower by 1.2% to NGN312.84 billion (-3.6% y/y).

Flat-to-declining gross margins: We revise our gross margin estimate for 2019E 72 bps lower to 38.6%, and estimates over 2020-2021E to average 39%. Margin impairment is expected to continue until 2021FY, with NB facing costs, excise, and selling price pressures. Excise duty is expected to grow by NGN0.35/cl by H1-19, further impacting net revenues. Although management has stated it is prepared to take price increases throughout the year, we think this will be greatly dependent on competition (NB hastily hiked, then reversed, prices on Star Radler, Life, Gulder, and Goldberg in H1-18 following the increase in excise, however, competitors retained prices).

EBITDA to decline on expected higher OPEX, in bid to support volumes: We cut 2019E EBITDA forecast by 14.6%, as we expect OPEX to reflect increased marketing expenditure in pursuit of the shift from a sell-in to more of a sell-out strategy to address dwindling volumes.

We forecast only a marginal decline in NB’s net finance costs (vs. 28.2% decrease in 2018FY), with borrowings (NGN41.13 billion in 2018FY) expected to moderate in line with a decline receivables.

Valuation: The net impact of the changes to our model is a cut to 2019E EPS estimate to NGN1.74 (from NGN2.63 previously) and TP to NGN55.89 (previously NGN68.96), with SELL rating. YTD, NB’s stock (-6%) has underperformed both the Consumer Goods (-1.72%) index and the broad All-Share Index (+2.36%). On our estimates, NB currently trades on 2019E P/E and EV/EBITDA multiples of 45.1x and 11.0x respectively, relative to MEA peer averages of 22.24x and 11.7x respectively.

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