February 26, 2020/InvestmentOne Report

Flat topline performance: down 0.4% y/y.

·         Slightly Improved gross profit margin: up 151bps y/y.

·         Rise in opex/sales ratio: up 204bps y/y.

·         Contraction in PBT Margin: down 184bps y/y.

Nigerian Breweries released its FY 2019 result recently; the scorecard largely reflected the persistent pressures faced by the Breweries sector, characterized by lackluster topline performance, heightened opex led by marketing strategies and ultimately dwindling profits.

We believe the challenges faced, which include weak consumer spending across the country, challenging operating environment and the negative effect of implemented excise duties remained challenges for the FMCG in the year 2019.  

Excise Duties and Opex Bite Margins

Looking closely at the result, we saw topline print flatly vs 2018 earnings as the company recorded net revenues (post-excise duty charges) of N323billion. According to management, gross revenues rose y/y on the back of strong growth in Heineken and better mix of malt but offset by the impact of excise duties. We highlight that earnings came under more pressure following the y/y revision in excise duties in 2019 (N0.35 per CL vs N0.30 per CL in 2018). We believe earnings were supported by the marketing drive of the company; we saw selling and distribution expenses rise by 10.9% y/y.

Gross profit margin improved by 151bps following price increases before the festive season, solid growth in premium brands and reduced cost of raw materials.

Moving down the P&L, we saw total opex increase by 6.8% y/y, despite a 6.9% y/y drop in administrative expenses on the back of the company’s marketing drive. More specifically, we saw advertising and sales promotion surge by 21.7% to print at N28.9billion. This has been a common trend in the Breweries space with players looking to boost sales volumes given the limited ability to raise costs.

The company recorded a net finance cost of about N12billion, 53.5% higher than the previous year owing to increased borrowing levels further leading to PBT margin printing at 7.2%, a 184bps contraction from 2018. 

Outlook

Going forward, we expect the company to see some support from the recent price increases to reflect cost pressures and the increase in minimum wage. Further to this, the company’s premiumisation plan and cost management strategies could help improve margin performance. With that being said, we remain wary of the fragile consumer spending power currently being faced by the nation coupled with inflationary pressures (including the contagion effects of a looming devaluation). These could limit profitability of NB significantly particularly given the pressures already faced.

We highlight that in 2020, the company has increased prices across segments to reflect VAT increment (from 5.00% to 7.50%) and we envisage the possibility of another price hike in the works.

With that being said, we retain our outlook for pressured earnings for NB amidst intense competition between industry players, especially from International Breweries Plc. Also, the question of the FG’s future decisions regarding excise duties for breweries players beyond 2020 also remains a concern for NB. The company would need to step on its marketing strategies to sustain volume growth whilst looking for opportunity for price increase.