July 31, 2019/Cordros Report
Event: NB published H1-19 results after the close of market yesterday, reporting EPS decline of 27.8% y/y. For the three months ended June (Q2), EPS declined 35.7% y/y. EPS was impacted by lower revenue, higher operating expenditure and net finance costs. The achieved revenue was slightly below our estimates (-3% variance), while EPS came in much lower than our estimates (-27% variance) on higher finance costs.
Net revenue declined 1.4% y/y in H1-19 (Q2-19: -3.1% y/y). The excise duty line was surprisingly absent from its income statement, however, in our view, amidst improved volume outturn, the decline in revenue is attributable to the higher excise duty expense compared to last year (excise duty on beer increased by 17% to NGN0.35/cl in early June). In its half-year conference call, management of Heineken NV (NB’s parent company) stated that in Nigeria, its premium and mainstream portfolios grew double-digit, with malt volumes growing high-single-digit as well. On a quarter-on-quarter basis, net revenue declined 4.4%.
Gross profit margin printed 42.1% in Q2-19, in line with the 42.2% we estimated for the quarter and equaled the three-quarter high recorded in Q1-19. The relatively strong margin is indicative of (1) the resurgence in the growth of the premium segment, which is typically twice as profitable as the value segment, and (2) significant slowdown in downtrading. On a year-on-year basis, gross margin compressed by a marginal 30 bps, as net revenue declined faster than COGS (-3.1% y/y).
OPEX rose by 8.8% y/y in Q2-19, with the ratio-to-revenue coming in at 30.4%, in line with our estimates (1% variance). The result shows a 19.5% y/y increase in advertising and sales expenses (34.2% of total OPEX), reflecting its focus on increasing brand visibility – ‘sell-out’ strategy. Other income grew 24.8% y/y (it is not clear at this stage what led to the significant increase), however this was not enough to offset the rise in OPEX, resulting in EBIT and EBITDA moderating by 25.4% y/y and 13.7% y/y, with 12.0% (-358 bps) and 21.4% (-263 bps) margins, respectively.
Elsewhere, a net finance cost of NGN2.45 billion was recorded, 48.5% higher y/y, as a 44% increase in finance costs outweighed a 4% rise in finance income. On finance costs, we note that the balance of bank overdrafts and commercial papers is higher compared to Q4-18 (+1,067%), following NBs NGN15 billion commercial paper issuance in April.
Net revenue declined 1.4% y/y in H1-19 (Q2-19: -3.1% y/y). The excise duty line was surprisingly absent from its income statement, however, in our view, amidst improved volume outturn, the decline in revenue is attributable to the higher excise duty expense compared to last year (excise duty on beer increased by 17% to NGN0.35/cl in early June). In its half-year conference call, management of Heineken NV (NB’s parent company) stated that in Nigeria, its premium and mainstream portfolios grew double-digit, with malt volumes growing high-single-digit as well. On a quarter-on-quarter basis, net revenue declined 4.4%.
Gross profit margin printed 42.1% in Q2-19, in line with the 42.2% we estimated for the quarter and equaled the three-quarter high recorded in Q1-19. The relatively strong margin is indicative of (1) the resurgence in the growth of the premium segment, which is typically twice as profitable as the value segment, and (2) significant slowdown in downtrading. On a year-on-year basis, gross margin compressed by a marginal 30 bps, as net revenue declined faster than COGS (-3.1% y/y).
OPEX rose by 8.8% y/y in Q2-19, with the ratio-to-revenue coming in at 30.4%, in line with our estimates (1% variance). The result shows a 19.5% y/y increase in advertising and sales expenses (34.2% of total OPEX), reflecting its focus on increasing brand visibility – ‘sell-out’ strategy. Other income grew 24.8% y/y (it is not clear at this stage what led to the significant increase), however this was not enough to offset the rise in OPEX, resulting in EBIT and EBITDA moderating by 25.4% y/y and 13.7% y/y, with 12.0% (-358 bps) and 21.4% (-263 bps) margins, respectively.
Elsewhere, a net finance cost of NGN2.45 billion was recorded, 48.5% higher y/y, as a 44% increase in finance costs outweighed a 4% rise in finance income. On finance costs, we note that the balance of bank overdrafts and commercial papers is higher compared to Q4-18 (+1,067%), following NBs NGN15 billion commercial paper issuance in April.
Compared to Q1-19, PAT was down 34.1%, driven by much higher OPEX (+25.1%), as advertising and sales expense surged 113.4% in the period. The effective tax rate in the quarter was 33.4%, up from 33.1% in Q2-18 and 33.0% in Q1-19.
Comment: NB’s performance reflects the continuing challenging operating environment. We like that the company sustained relative strong gross margin in Q2, indicative of improving beer demand, especially in the premium segment. However, excise hike – the full impact of the increase will be reflected in Q3 results – and elevated operating costs remain major headwinds. We expect the reaction to the result will be neutral. Our estimates are under review.
