March 4, 2021/InvestmentOne Report

·        Topline performance improved: up 18.0% y/y, 25.3% q/q.

·        Deteriorating gross profit margin at 27.9%: down 1226bps y/y, 956bps q/q.

·        Gains on opex/sales ratio: down 771bps y/y, 741bps q/q.

·        PBT Margin performance at 0.6%: up 646bps y/y, 262bps q/q.

·        The earlier released Q4 2020 scorecard for Nigerian Breweries showcased improved fortunes for the company’s earnings prospects following the easing of nationwide lockdown measures which coincided with the festive season during the quarter under review. It was characterized by a boost in volume sales and improvement in opex/sales, which were not enough to offset the company’s higher input costs, increased interest expense on lease liabilities and FX losses. As such, profit fell sharply, with net profit down by 88.8% y/y.  

·        Volumes up on Festive Lockdown Easing        

 ·        Despite the challenges brought about by Covid-19 during the year 2020, Nigerian Breweries printed an 4.3% improvement in its topline numbers as volumes rebounded strongly in the second half of the year as Covid-19 related lockdown measures wound down and trade channels reopened across the country. We opine that bars and restaurants would have undertaken mass restocking exercises during the period under review following the partial lifting of lockdown. The company witnessed double digit growth y/y from its Heineken and Tiger brands, while a strong recovery in the stout brand Legend was also positive. We were excited to see the company innovate its way through the pandemic, providing more product offerings in terms of size, flavour and brand new product offerings. With that said, more accentuated was the impact of cost pressures reflecting on the company’s margins as gross profit margin fell by 542bps y/y to 35.2%. This was led by a 13.87% surge in cost of goods sold on the back of cost pressures on raw materials and packaging prices. We believe this was driven largely by the backdrop of heightened inflation and recent devaluation exercises on the naira.        

·        Bottom Line Unsupported by Input and Finance Costs

·        Going down the P&L, Earnings before Interest and Tax (EBIT) saw some respite as the company managed its operating expenditures (opex) prudently. NB was able to ramp up its digital presence, in support of sales, and materially cut down on selling and distribution expenses (down 9% y/y) to N70.7billion. This was supportive of opex/sales, dropping by 337bps y/y to 26.7%. The gains, however, did not trickle down to the bottom-line as PBT margin printed at 3.40% for the year, 379bps lower y/y. This was driven by the aforementioned cost pressures faced by the company and a surge in finance cost. While the company reaped the benefits of lower interest rate environment, with interest payments on loans and borrowings down by 28.3% despite increased borrowings, finance cost was impacted by a material N4.8billion net loss on FX transactions (up 224% y/y).  Finance cost was also driven up by a N4.2billion interest charge on lease liabilities, compared to N19.7million due to the introduction of IFRS 16.·         

·        Cost Factors Overshadow Volume Growth

·        In the final quarter of the year, the brewer saw a stellar boost in volumes, with turnover up by 18% to its highest level on record. Heightened COGS however made that a transient victory with gross profit margin printing at 27.9%, the lowest level on record. This was largely reflective of the cost factors elaborated on above. We saw the brewer’s net profit down by about 88.9% y/y, following a 67.7%y/y surge in net finance cost, which more than offset the gains recorded in taming opex (-13.50%) y/y.

·        Nigerian Breweries has announced a final dividend of N0.69, representing a dividend yield of 1.33% on a trading price of N52 per share. Investors were also provided the option of receiving new shares in the company in place of dividends.·      

·        All Eyes on Cost Factors

·        Going forward, we expect all eyes to be on the company’s cost lines with food inflation skyrocketing and fx challenges likely to persist for much of 2021. Particularly, developments around VAT, depreciation of the naira and excise duties are of interest. Also, with the lockdown measures mostly already wound down, topline may reflect the stark reality of weakened consumer demand and stiff competition. With that said, we commend the company’s drive towards cash collection as trade receivables improved through the year by about 76% y/y.

·        At the FY 2020 conference call, management suggested the possibility of a price increase sometime in March, as competition has already communicated it will raise prices in March. This in addition to the introduction of new product offerings, particularly its premium brand, Desperados, could be supportive of topline.

·        Lastly, we believe the company’s efforts to improve local sourcing of raw materials (about 51% in 2020) should provide some cushion against further devaluation of the naira and other supply channel challenges.

Source: Company’s Financials, Investment One Research