Culled—Proshare

May 6, 2020

by FBNQuest Research

-22% cut to average EPS estimates over the 2020-22E period

We have cut our target price for Nigerian Breweries (NB) by -30% to N40.5 on the back of a 150bp increase in our equity risk premium assumption to 7.5% and downward adjustments to our earnings forecasts. NB’s Q1 PBT missed our forecast of N10.7bn by -23%, largely due to -7.1% and 7.8% negative surprises in sales and opex. As such, our 2020-22E EPS forecasts are lower by an average of -22%.

These new forecasts have also taken into account a potential slump in demand in Q2 and Q3 as a result of the virus outbreak, and higher input costs and fx losses resulting from the weaker exchange rate. We also remain mindful of the strong competitive headwinds in the beer market. Indeed, NB’s ability to pass on higher input costs is likely to be constrained by sustained price competition from International Breweries. A positive adjustment made to our forecasts is a -10% average reduction to  2020-22E net interest expense forecasts. Early this year, NB raised N53.8bn via a commercial paper at an average yield of 6.2%, which compares favourably to the 13.6% average yield for the papers it issued last year.

We therefore expect a decline in borrowing costs over the coming quarters. NB shares are currently trading on a 2020E P/E multiple of 19.3x for a 2020-22E average EPS growth of 5%. Year-to-date, NB shares have sold off by -49% and underperformed the broad market index by -35%. Consequently, our new price target implies a considerable upside potential of 35% from current levels. We however retain our Underperform rating despite the upside, given the absence of a near-to-medium term catalyst for a rally in the shares.

Q1 PBT down -28% y/y

Sales were flattish y/y in Q1, whereas gross margin narrowed by -19bps y/y to 41.9%. Bottom-line was largely impacted by a 14% y/y increase in opex to N24.1bn. As such PBT for the quarter declined by -28% y/y to N8.3bn. On a sequential basis, sales declined by -5% q/q whereas gross margin expanded by 174bps q/q. Opex and net interest expense declined by -5% q/q and -31% q/q respectively while other income was down -31% q/q. PBT therefore increased by 34% q/q. Relative to our forecasts, PBT missed by -23% driven by negative surprises in sales (-7%) and opex (8%).