October 28, 2019/Cordros Report
Gross revenue grew 2.7% y/y (9M-19: 1.9% y/y) in Q3; however, gains were eroded by the higher excise duty expense compared to last year, leading to flat net revenue growth (+0.1% y/y) in the period. In its Q3-19 trading update, Heineken NV (NB’s parent company) stated that Nigeria beer volumes grew low-single digit. Amidst flat pricing, this is, in our view, is in line with the achieved gross revenue growth.However, on a quarter-on-quarter basis, net revenue declined 24.7% – the impact of the higher excise duty and Q3 being a seasonally weak quarter.
Gross profit margin printed 37.4% y/y in Q3-19, 895bps higher than in Q3-18, and the strongest Q3 reading since 2015. The relatively strong margin is indicative of the continued growth in the premium segment – Heineken NV stated that the premium portfolio grew double-digit, driven by the Heineken brand – which has been positive for mix and provides evidence that premiumisation continues to be supported.
OPEX rose by 6.1% y/y in Q3-19, with the ratio-to-revenue coming in at 36.9%. The result shows a 14.3% y/y increase in marketing and distribution expenses reflecting its focus on increasing brand visibility – ‘sell-out’ strategy. Other income grew 55.0% y/y (it is not clear at this stage what led to the significant increase), which when combined with the improved gross profit, was enough to offset the rise in OPEX. This resulted in EBIT and EBITDA rising by 118.2% y/y and 121.0% y/y, with 1.1% (+700 bps) and 13.8% (+754 bps) margins, respectively.
Elsewhere, a net finance cost of NGN2.90 billion was recorded –141.5% higher y/y –, as a 140.2% y/y increase in finance costs outweighed a 59.7% rise in finance income. On finance costs, we note that the balance of bank overdrafts and commercial papers is higher compared to Q3-18 (+148.2%) and Q4-18 (+1,914.6%), following NBs NGN30.00 billion commercial paper issuances in April (NGN15.00 billion) and June (NGN15.00 billion).
Comment: We like that the company continues to sustain a relatively strong gross margin, especially amidst the challenging operating environment. This implies that management’s premiumisation strategy is bearing fruit. We expect stronger earnings in Q4 (1) due to year end festivities, and (2) as the company has notified distributors of impending price increases across key brands in November, both of which will offer a boost to topline. With share price down 46.1% YTD and the stock trading at a 2020E P/E of 19.7x, which is a discount to historical average forward P/E of 23.5x, we expect a positive reaction. Our estimates are under review.
