Culled—Proshare

May 19, 2020

By FBNQuest Research

 Increases to earnings forecasts and target price

International Breweries’ (IB) N165bn rights issue undertaken last year had a more positive impact on earnings than we had anticipated. Results were largely supported by a significant drop in borrowing costs thanks to a deleveraged balance sheet. IB reported a net interest income of N346bn versus a net interest expense of -N5.1bn in Q1 2019, which also compares favourably with our forecast of -N2.8bn.

However, Q1 2020 earnings were largely eroded by a -N9.9bn fx loss resulting from the naira depreciation, leading to a pre-tax loss of -N7.7bn compared with an adjusted -N2.4bn. The adjusted loss was more than half that of Q1 2019 and 68% less than our forecast. Going forward, we expect fx losses to be a recurring line item over the rest of the year, given that i) c.40% of IB’s payables are dollar denominated and ii) the company still has an outstanding foreign loan obligation of around US$278m that matures mid- next year.

We also see weaker beer volumes in Q2 – due to the lockdown that was implemented in late March – and a tighter squeeze on gross margin because of a higher cost of imports combined with IB’s relentless price competition. That said, we expect that post-2020, the improved balance sheet will drive earnings and that the negative fx effect will ease off. In addition, besides borrowing costs, we have reduced our 2020E opex forecast given the -27% positive surprise in Q1.

We therefore modelled a 32% average reduction in our pre-tax loss forecasts for 2020-22E. This translates to a 26% increase in our price target to N6.0. Year-to-date, IB shares have lost -47%, underperforming the broad market by -37%. Our new price target implies an upside potential of 20%, but we see bearish sentiments persisting given negative earnings over forecast years. We therefore retain our Underperform rating.

N10bn fx loss primarily responsible for Q1 pre-tax loss

Sales were flat y/y at N35.3bn but gross margin contracted by -803bps to 17.5%. Opex was flat y/y at -N8.5bn while other income was up significantly to N4.3bn, whereas the positive impact of lower borrowing costs was offset by the -N9.9bn fx loss. On a sequential basis, gross margin expanded significantly q/q, while the Q1 net interest income compares with -N2.0bn net interest expense in Q4 2019. The company booked a lower fx loss of -N2.9bn in the previous quarter.

Nevertheless, Q1 2020 pre-tax loss was lower q/q by -36%. Relative to our forecasts, gross margin was -454bps narrower than forecast whereas net interest expense and opex beat our forecasts. Despite the variances from individual line items, the pretax loss was in line with our Q1 forecast.