August 6, 2020/InvestmentOne Report

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·        Weak topline performance: down 21.1% y/y, 17.5% q/q.

·        Pressured gross profit margin at 35.4%: down 673bps y/y, 653bps q/q.

·        Mixed opex/sales ratio: down 86bps y/y, up 57bps q/q.

·        Poor PBT Margin performance at 0.1%: down 905bps y/y, 984bps q/q.

The earlier released Q2 2020 scorecard for Nigerian Breweries confirmed some of our worries for the company’s earnings prospects given that the nationwide lockdown measures were more accentuated in the quarter under review. It was characterized by a plunge in topline following a rise in excise duties, VAT and inflation against the backdrop of strict lockdown measures.  

Lackluster Performance on Volume Dip

Looking closely at the result, we saw net revenues (post-excise duty charges) print at N68.6billion in the quarter under review. According to the parent company, Heineken, on a half-year basis the company recorded some market share gains following growth in its premium portfolio, even as Maltina, its leading non-alcoholic brand recorded flat volumes y/y. However, given the lockdown restrictions in place during the quarter, we believe volumes likely declined across the company’s various portfolios. In addition, we noticed a further rise in trade and other receivables, following through from Q1 2020, suggesting the company might be resorting more to credit sales given the current macroeconomic backdrop and possibly a strategy to gain market share. GPM fell by 673bps y/y as cost pressures resulting from heightened inflation and the recent devaluation of the naira likely trickled into COGS as expenditure on raw materials and consumables only dropped by 8.9% y/y during the quarter.  

Finance Cost Adds Blow to Net Income

Moving down the P&L line, Net profit margin crashed to its lowest level on record, driven by the aforementioned, coupled with a 65.6% surge in net finance cost. These combined to offset a 23.3% drop in operating expenses, majorly driven by a 28.09% fall in Selling and Distribution expenses, and a N14million tax credit, compared a N2.8billion tax charge in Q2 2019. We highlight that the N1.5billion surge in finance cost was driven by a N45.2billion upsurge in the company’s interest bearing debt position.  

Half Year Performance Marred by COVID

So far this year, the brewer’s net profit is trailing by 58.0% compared to H1 2019 on the back of a 10.8% dip in earnings, pressured COGS and a  jump in net finance cost (+32.6%) following the increased debt position in 2020. All of these combined to overwhelm the positive effects of a 54.7% slash in tax charge and a 6.7% drop in operating expense. We expect FY 2020 to trail significantly given the likelihood of continued social distancing and also following weak H1 performance, which traditionally is a more significant contributing half to earnings. 

Covid-19 Set to Pressure Earnings

Going forward, we expect earnings to continue to be pressured given that lockdown measures still largely in place. This, we believe, would be further exacerbated by rising inflation, the recent hike in VAT rate to 7.5%, dollar illiquidity and a further weakening in the NGN vs USD. Additionally, the economic impact of the virus may stretch consumer pockets extensively, raising the risk of a decline in demand for its products, particularly its premium portfolio. With that said, we think the recent unwinding of restrictions in major cities may provide some succor for volume performance in the coming quarters.

Nonetheless, we remain wary of stiff competition, fragile consumer spending power fueled by inflationary pressures and remuneration cuts across the general populace. These could limit profitability of NB significantly particularly given the pressures already faced by the company, reflecting in cost lines and financing expenses. However, we believe the company’s efforts to improve local sourcing of raw materials (currently >55%) should provide some cushion against devaluation of the naira and other supply channel challenges. 

Source: Company’s Financials, Investment One Research