April 25, 2019/Cordros Report
Event: NB published Q1-19 results after close of market yesterday, with EPS decline of 21.3% y/y, despite growing revenue. EPS was impacted by gross margin decline, as well as higher operating expenditure and net finance costs. Noteworthy, however, both the achieved revenue and earnings slightly beat our estimates for the three months period by 5% and 2% respectively. Annualized, the Q1-19 EPS of NGN1.00 is 31% ahead of consensus estimate for 2019E.
Gross revenue grew 3.3% y/y; however, gains were eroded by higher excise duty expense compared to last year, leading to flat net revenue growth (+0.4 y/y%) in the period. In its Q1-19 trading update, Heineken NV (NB’s parent company) stated that “Nigeria beer volume grew mid-single digit”. In our view, reduced activity around the election days likely dampened sales. We also note that gross revenue growing below implied volume growth of 4%-6% is reflective of a weaker price / volume mix skew as consumers continue to downtrade to cheaper/ economy brands.
Gross profit margin decreased 373 bps y/y to 42.1%, in line with the 42.5% we estimated for the quarter, following (1) the negative product mix shift as discussed above, (2) higher excise duty expense, (3) the 7.3% increase in COGS – raw materials and consumables – as on our estimate, the price of barley (+19% y/y) is relatively higher compared to last year, and (4) production disruptions in February due to election postponement, as alluded to by management.
OPEX rose by 2.8% y/y in Q1-19, with the ratio-to-revenue coming in at 25.4%, both slightly lower than our estimates. The result shows a 13% increase in advertising and sales expenses (35% of total OPEX), reflecting its focus on increasing brand visibility – sell out strategy. Other income declined 28.0%, resulting in EBIT and EBITDA moderating by 20.4% y/y and 12.8% y/y, with 16.9% (-441 bps) and 26.4% (-399 bps) margins, respectively.
Elsewhere, net finance cost of NGN2.6 billion was recorded, 7.6% higher y/y, comprising 6.4% increase in finance costs and 75.1% reduction in finance income. On finance costs, we note that the balance of borrowings is higher compared to Q4-18 (+8%) and more than triples Q1-18’s.
Compared to Q4-18, PAT was up 72.7%, driven by much lower cost of sales (-10.9%), stronger gross margin (+481 bps), and lower OPEX (-8.8%). Effective tax rate in the quarter was 33.0%, down from 33.1% in Q4-18 and Q1-18.
Comment: NB’s Q1 performance was broadly in line with our expectation (EPS: 2% variance). We expect reaction to the result will be neutral – stock price has lost 25% since we updated on the group at the top of March – as underlying issues still persist. Our estimates are under review.
