April 26, 2021/InvestmentOne Report

·        Topline performance improved: up 27.0% y/y, 2.6% q/q.

·        Deteriorating gross profit margin at 37.5%: down 437bps y/y, 440bps q/q.

·        Mixed opex/sales ratio: down 480bps y/y, up 290 bps q/q.

·        PBT Margin performance at 10.9%: up 95bps y/y, 1030bps q/q.

The earlier released Q1 2021 scorecard for Nigerian Breweries showcased better than expected fortunes for the company’s earnings prospects following further easing of nationwide lockdown measures during the quarter under review. It was characterized by a solid boost in volume sales, price increases and an improvement in opex/sales, which were enough to offset the company’s higher input costs, slight uptick in net finance cost and higher tax bill. As such, with net profit rose by an impressive 39.1% y/y. 

Strong Volume Growth Persists

Following further loosening of Covid-19 restrictions across the country and sustained improvement in demand, we witnessed topline print higher by 27.0% y/y to N105.7billion. According to the parent company, Heineken N.V, total volume grew in the mid-teens despite supply constraints. The premium portfolio, led by Heineken and Tiger grew by more than 40%, while the low and non-alcoholic portfolio grew by more than 30%, led by Maltina. We believe the company’s drive to provide more product offerings in terms of size, flavour and brand new offerings could have also been supportive of driving demand northwards. Cost pressures were prominent in the quarter, with gross profit margin dropping by 437bps y/y to 37.5%. This was led by a 36.56% y/y rise in cost of goods sold on the back of a 54.0% jump in expenses on raw materials and consumables. We believe this was driven largely by the impact of heightened inflation and recent devaluation exercises.

Going down the P&L, Earnings before Interest and Tax (EBIT) saw some improvement as the company managed to keep a lid on its operating expenditures (opex). We opine that the company continued to see support from increased digital presence ramped up in recent quarters. This was supportive of opex/sales, dropping by 480bps y/y to 24.2%. Ultimately, PBT rose by 39.1% y/y to N11.5billion, as the aforementioned factors were enough to overshadow a 12.8% increase in net finance cost. 

Remarkable Sequential Performance

On a q/q basis, the brewer saw topline print upwards by 2.6% to its highest level on record. We believe this to be a laudable feat considering the impact of Covid-19 and inflation in consumer pockets. Although COGS reflected pressure during the quarter, it was lower than levels witnessed in Q4 2020 by 11.1%, resulting in a 964bps improvement in gross profit margin. PBT was reported at N11.5billion, from a measly N599million position in the preceding quarter. The surge in bottom line was driven by the aforementioned, coupled with a 54.1% lower finance cost, which was enough to offset a 16.8% increase in opex.

All Eyes on Cost Factors

Going forward, we remain wary of the impact on the company’s cost lines with food inflation skyrocketing and fx challenges likely to persist for much of 2021. More particularly, developments around VAT, depreciation of the naira and excise duties are of interest.

We believe the company should see some support following its recent price increase and product offering refresh ie redesigning of packaging and introduction of new variants.

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