August 1, 2019/InvestmentOne Report

   Mixed topline performance: up 4.4% q/q, down 3.1% y/y.

·         Gross profit margin at 42.1%: flat q/q, down 33bps y/y.

·         Rising opex/sales ratio: up 504bps q/q, 332bps y/y.

·         Contraction in PBT Margin: down 461bps q/q, 456bps y/y. 

Nigerian Breweries Plc (NB) released its Q2 2019 scorecard earlier this week, which showed a slight contraction in revenue compared to the corresponding quarter in 2018. We believe this may not be unconnected with the weak consumer spending across the country, heightened competition in the breweries space as well as the negative impact of the implemented excise duties.  

Escalating Operating and Finance Costs Bite into Profits

Despite the volume growth reported by the parent company, Heineken, Nigerian Breweries posted an unflattering topline performance (down 3.1% y/y). We attribute the recent uninspiring turnover performances to the stiff competition within the local breweries space. Notwithstanding, the company’s gross margin declined only marginally by 33bps y/y reflecting the slowdown in expenses on raw materials and consumables. 

Going down the P&L line, PBT margin fell by 456bps y/y following a 332bps expansion in opex/sales ratio and a 48.4% y/y rise in net finance cost. The 8.8% y/y  increase in operating expenses was driven by a 12.5% escalation in marketing and distribution expenses on the back of aggressive marketing tactics employed by the company; advertising and sales expenses grew by 19.5% to N9.05billion. We attribute the 44.0% rise in finance cost to the recent commercial paper issuance. 

Volume Growth Overshadowed by Distribution Expenses 

Similarly, on a sequential basis, we saw a 461bps drop in PBT margin. This was on the back of an uptrend in opex/sales ratio (up by 504bps), led by a surge in selling and distribution expenditure. This was enough to offset a 5.6% drop in net finance cost coupled with a growth in volume as revenue rose by 4.4%.  

According to the parent company Heineken, there was a reported mid-single digit beer volume growth in Nigeria while the premium and mainstream portfolios grew by double digits, led by Heineken, Star and Maltina. Notwithstanding, the 8.67% q/q rise in raw materials and consumables was enough to bite into the topline growth recorded, as the company reported a flat gross margin q/q.  

Improvement In Cash Generated From Operations 

Compared to Q2 2018, cash flow from operations saw a significant improvement in Q2 2019. It came in positive at about N15.02billion as against a balance of N2.97billion in Q2 2018. While pre-working capital adjustment showed that there was a drop in Q2 2019 (balance of N40.36billion vs Q2 2018 balance of N46.43billion), there was an improvement in cash flow from operations after working capital adjustment as the increase in trade and other receivables slowed compared to last year. 

In the near term, we expect consumer spending to see improvement from the implementation of the approved increase in minimum wage as well as execution 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. With that being said, we believe there remains the potential for Nigerian Breweries to increase prices to combat the impact of excise tax increases and inflationary pressures.  

Source: Company financials, Investment One Research