April 26, 2019/InvestmentOne report

·         Mixed topline performance: down 3.53% q/q, up 0.38% y/y.

·         Diversified gross profit margin: up 481bps q/q, down 373bps y/y..

·         Varied opex/sales ratio: down 148bps q/q, up 61bps y/y.

·         Mixed PBT Margin: up 571bps q/q, down 462bps y/y.

Nigerian Breweries Plc (NB) released its Q1 2019 scorecard earlier this week, which showed that operational performance continued to be constrained by weak consumer spending, heightened competition in the brewery space as well as the negative impact of the implemented excise duties. In summary, despite relatively flat opex/sales ratio, PBT margin declined by 462bps y/y to 13.76%, majorly driven by the 373bps y/y contraction in gross profit margin and the 7.63% y/y increase net finance cost.   

However, on a sequential basis, we saw a 571bps rise in PBT margin. This was on the back of the 481bps q/q advancement in gross profit margin and the 148bps q/q decrease in opex/sales ratio, which outweighed the 14.89% q/q increase in net finance cost. 

Have We Started To See A Recovery In Topline? 

On a y/y basis, we have observed a mild recovery in topline performance, albeit still largely uninspiring. We recall that net revenue contracted by 11.23% y/y in Q3 2018 and then fell again by 3.94% y/y in Q4 2018. However, in Q1 2019, we saw net revenue print somewhat flat, up by a marginal 0.38% y/y. Nonetheless, our position remains that volume growth remains weak due to the factors highlighted earlier. On a q/q basis, net revenue shed 3.53%. This largely reflects what has been observed historically, as seasonal demand usually feeds into the company’s fourth quarter performance. 

Following through from the above, cost pressures continued to plague NB’s operational performance leading to a decline in gross profit margin by 373bps y/y to 42.09% in Q1 2019. This, combined with uninspiring volume growth, may have contributed to the 7.80% y/y fall in gross profit to N35.05billion. However, gross margin rose by 481bps q/q to 42.09%, an indication of better input cost management, which if sustained, may be positive for bottom line performance going forward. 

Relatively Flat Opex/Sales Ratio 

NB’s Opex/sales ratio came in somewhat flat y/y in Q1 2019, rising by just 61bps y/y to 25.40%. The rise in opex/sales ratio was constrained by the 12.07% reduction in administrative expenses, which neutralized what could have been the impact of a 7.91% y/y rise in marketing and distribution expenses on opex/sales ratio. We suspect the strategy of the brewery giant may have been to cut down on its administrative expenses to support bottomline performance while it aggressively invested on its marketing and distribution strategies to grow volume amidst the competitiveness in that space. 

On a q/q basis, opex/sales ratio fell by 148bps y/y largely due to the decline in marketing and distribution expenses while administrative expenses was somewhat flat. 

Higher Net Finance Cost

NB recorded an increase in its net finance cost in Q1 2019, the first in the last four quarters. The rise in net finance cost was driven by a combination of lower y/y finance income and higher y/y finance cost. Looking into NB’s statement of financial position, we have reasons to suspect that the rise in its finance cost may have been due to higher loan outstanding, which grew by 47.11% y/y to N44.81billion. In addition, lower cash balance on a y/y basis in Q1 2019 may explain why finance income declined in the quarter relative to its levels in Q1 2018. 

The same trend was observed on a q/q basis, where net finance cost rose by 14.89%, following lower finance income and higher finance cost.  

Improvement In Cash Generated From Operations 

Compared to Q1 2018, cash flow from operations saw improvement in Q1 2019. It came in positive at about N 7.33billion as against a negative balance of N7.07billion in Q1 2018. While pre-working capital adjustment showed that Q1 2019 balance of N21.72billion was lower than Q1 2018 balance of N24.43billion, the positive cash flow from operations after working capital adjustment was driven by the slow down in the rise in trade and other receivables as well as the decline in trade and other payables. 

In the near term, we expect consumer spending to see improvement from the implementation of the approved increase in minimum wage as well as early approval of the 2019 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