·        Unimpressive topline performance: down 0.1% y/y, 4.7% q/q.

·        Mixed gross profit margin at 41.9%: down 20bps y/y, up 170bps q/q.

·        Rise in opex/sales ratio: up 360bps y/y, 10bps q/q.

·        Mixed PBT Margin at 9.9%: down 380bps y/y, up 290bps q/q.

Nigerian Breweries released its Q1 2020 result which validated our concerns for Breweries sector following the economic ravage of the coronavirus on the country. It was characterized by shrinking topline performance, heightened opex led by marketing strategies and ultimately dwindling profits. We believe this, coupled with other challenges faced such as weak consumer spending, challenging operating environment and the negative effect of implemented excise duties, remained challenges for the company.

Lackluster Performance on Volume Dip

Looking closely at the result, we saw topline print flatly vs Q1 2019 earnings as the company recorded net revenues (post-excise duty charges) of N83.2billion. According to the parent company, Heineken, beer volume was broadly flat during the quarter under review and declined by a high single digit in March 2020 on the back of price increases undertaken in February and the restriction on distribution of alcohol beverages. More notably, we highlight that the company’s earnings were supported by aggressive marketing strategies and credit sales as we saw an increase in trade and other receivables. On the back of the aforementioned, cash from operations printed negatively for the first time since Q1 2018. Moving down the P&L line, we witnessed a jump in operating expenses, particularly driven by Marketing and Distribution expenses (up 13.5% y/y). Opex/sales ratio rose by 360bps y/y, printing at 29.0%. Resultantly, PBT margin was down by 380bps y/y at 9.9% as PBT printed at N8.3billion for the quarter.  

On a sequential basis, topline declined by 4.7% q/q as has been the trend due to the festive season in Q4. We however witnessed improvements on a margin basis as PBT margin rose by 290bps q/q driven by a 32.1% q/q decline in net finance cost, which may be related to the company taking advantage of the current low interest rate environment; a 10bps q/q improvement in opex/sales, majorly driven by a drop in marketing activities; and a 170bps improvement in gross profit margin which may not be unconnected with the price increases of between 3-6% on various brands undertaken by the company.  

Covid-19 Set to Pressure Earnings

Going forward, we expect earnings to take a hit, particularly in Q2 2020. The initial impact of the crisis reflected visibly on volume performance in the month of March and is projected to worsen in Q2 as the impact of lockdown measures and other related restrictions materialize. Additionally, the economic impact of the virus and social distancing measures may limit topline performance for the rest of the year, even if lockdowns are completely lifted.

With that being said, we remain wary of stiff competition, fragile consumer spending power fueled by inflationary pressures and dollar illiquidity. These could limit profitability of NB significantly particularly given the pressures already faced by the company. However, we believe the company’s efforts to improve local sourcing of raw materials (>55%) should provide a cushion against a devaluation of the naira and other supply channel challenges.