October 29, 2021/Cordros Report

NB published Q3-21 (9M-21) results yesterday after the close of business, reporting an EPS decline of 63.1% y/y to NGN0.06 (Q3-20: NGN0.17). Weaker margins and higher finance costs impacted EPS for the quarter. However, for the nine months ended September (9M-21), EPS grew 18.4% y/y to NGN1.03. On the 9M-21 EPS of NGN1.03, the board has declared an interim dividend of NGN0.40/s, translating to a yield of 0.8% on the last closing price of NGN53.00/s (29 October).

Revenue increased by 21.6% y/y (9M-21: +32.1% y/y) in Q3-21. On revenue growth, we believe that (1) headline price increases across product categories, and (2) improved demand following the full reopening of the economy supported sales from on-trade channels (hotels, bars, restaurants, clubs, etc.), which account for c.64.0% of beer industry sales. On a q/q basis, net revenue declined 3.4% amid the third quarter being a seasonally weak quarter.
 
In its Q3-21 trading update, Heineken NV (NB’s parent company) highlighted that on Nigeria’s volume (1) the total sales volume grew by single-digit (2)Tiger and Maltina led the growth in the premium and non-alcoholic portfolios, respectively, and (3) tensions and disruptions in Eastern Nigeria impacted volumes.
 
Gross margin came in at 32.6% in Q3-21, 485bps lower than Q3-20’s print – the weakest reading in the year. The margin compression is indicative of the inflationary impact on input costs – COGS was upwardly sticky, growing by 31.1% y/y, faster than revenue (+21.6% y/y).
 
Consequently, EBIT and EBITDA declined by 35.3% y/y and 15.4% y/y to NGN4.82 billion and NGN14.85 billion, respectively, as the combination of lower gross margin outturn and an +18.9% y/y increase in operating expenses offset the top-line growth. Sequentially, EBITDA (-650bps) and EBIT (-423bps) margins contracted sharply to 14.9% (Q3-20: 21.4%) and 4.8% (Q3-20: 9.1%).
 
Net finance cost declined by 16.4% y/y, due to a 3.1% y/y decline in finance costs amid a 94.3% y/y decline in finance income, We attribute the decrease in finance costs to NB’s less reliance on bank overdrafts and commercial papers in the period. Precisely, the overdraft and Commercial paper financing declined sharply by 97.0% y/y in 9M-21 to NGN2.55 billion (9M-20: NGN85.82 billion).
 
Overall, the company recorded a PBT of NGN0.80 billion in Q3-21 (Q3-20: NGN2.63 billion). Following a NGN0.30 billion tax expense in the period, PAT came in lower at NGN0.50 billion (Q3-20: NGN1.35 billion).
 
Comment: NB’s Q3-21 performance expectedly reflects the seasonal effect associated with the third quarter. In addition, the prevailing FX issues and surging inflation continues to be a significant drag on margins and earnings, despite the top-line expansion. Nonetheless, we like that the brewer complemented its H1-21 earnings with consistent top-line growth, as indicated by the higher 9M-21 EPS. Meanwhile, we expect more robust earnings in Q4-21 due to (1) improved demand following year-end festivities and (2) further price increases across key brands in Q4-21, both of which will boost the top-line. Overall, we believe NB remains on track to deliver positive earnings in 2021FY. Our estimates are under review.