November 6, 2020/InvestmentOne Report

·        Topline performance bounce-back: up 25.6% y/y, 19.9% q/q.

·        Improved gross profit margin at 37.5%: up 2bps y/y, 210bps q/q.

·        Gains on opex/sales ratio: down 820bps y/y, 90bps q/q.

·        PBT Margin performance at 3.2%: up 657bps y/y, 310bps q/q.

The earlier released Q3 2020 scorecard for Nigerian Breweries showcased improved fortunes for the company’s earnings prospects following the easing of nationwide lockdown measures in the quarter under review. It was characterized by a boost in volume sales and a strong cost containment strategy, which overshadowed higher interest payments and the backdrop of weak economic fundamentals, albeit in comparison with weak base periods. 

A Post-Lockdown Resurgence

Looking more closely at the result, we witnessed turnover markedly increase (+25.6% y/y) as COVID-19 related lockdown measures wound down and trade channels gradually reopened across the nation. According to the parent company, Heineken N.V, beer volume grew in the mid-teens in the local market, ahead of the market. In addition, it reported that the non-alcoholic portfolio grew in the mid-twenties and the premium portfolio grew by more than half. We further highlight that the comparison period Q3 2019 was a low base period even as the third quarter is traditionally the slowest. We opine that bars and restaurants would have undertaken mass restocking exercises during the period under review following the lifting of lockdown. The rise in sales supported gross profit margin marginally (+2bps y/y) even as cost pressures reflected evidently in the company’s cost of goods sold (+25.5% y/y). We believe this was driven largely by the backdrop of heightened inflation and recent devaluation of the naira.  

Cost Containment Measures at Play

Going down the P&L, operating profit printed at N7.4billion, from N710million in Q3 2019. The surge was supported by a marked 7.8% dip in selling and distribution expenses. According to the parent company, across local operating companies, cost mitigation actions are being implemented to reduce all discretionary expenses while it provides support for its brands and route to markets. This was supportive of opex/sales ratio, which dwindled by 90bps y/y, even as administrative expenditure ticked up. In contrast, bottom line saw some drawback from net finance cost, which printed 65.0% higher y/y. The rise in finance cost, despite the low interest rate environment, may be attributable to the N90billion commercial paper issuance earlier in the year. Notwithstanding, PAT margin rose by 330bps y/y on the back of the aforementioned factors and a 350bps dip in effective tax rate.  

9M 2020 Performance Marred by COVID

So far this year, the brewer’s net profit is trailing by 43.5% compared to 9M 2019 on the back of a 0.7% dip in earnings, pressured gross margin and a jump in net finance cost (+44.8%) following the increased debt position in 2020. All of these combined to overwhelm the positive effects of a 18.4% slash in tax charge and a 5.2% drop in operating expenses. We expect FY 2020 to trail significantly given the dip in H1 2020, weakened consumer demand and continued social distancing measures through the year.

Nigerian Breweries has announced an interim dividend of N0.25, representing a dividend yield of 0.48% on a trading price of N52 per share.    

Covid-19 Still a Principal Factor

Going forward, we expect earnings to see some improvement as we head into the festive season, lockdown measures are wound down and business recovery accelerates. Nonetheless, we believe cost pressures would continue to be at play, further exacerbated by rising inflation, the 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. 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