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Equity report - Nigerian Breweries Plc - Some cause for cheer, but pressures persist

• Nigerian Breweries (NB) H1 19 performance showed a turnaround in volumes compared to volumes erosion for most part of 2018. According to NB’s parent company in a media release, Heineken volumes grew double digit while Malt and Beer volumes grew high and mid-single digit respectively. The growth in beer volumes particularly in the premium space – Star and Gulder – is in sync with our views in our earlier communicated report () wherein we reiterated our optimism for volumes growth in the Premium segment.
• Streamlining to Q2 specifically, due to higher base from last year’s price hike before reversal due to IB’s reluctance to increase prices and pass through of higher excise duty charge, the company reported a 3.1% YoY decline in net revenue. Further down, with underlying competition necessitating increased promotional activities and distribution expense, and higher financing cost, EPS declined 35.6% YoY to N1.63. Factoring the Q2 19 numbers, cumulative EPS over the first half of the year slipped 29.3% YoY to N1.63.
•  Going forward, following the persisting hurt to International Breweries (IB) earnings from cost inefficiencies and higher interest expense that has kept the company in a loss-making position, we think an end to the ongoing price war in the breweries sector is in the offing as IB would need to either raise prices or new capital in the near future. This bodes well for NB and paves way for better topline performance going forward. That said, while we remain cautiously optimistic on the company’s earnings over the rest of the year, we leave our FVE unchanged at N75.82, as the company looks set to deliver our 2019E EPS of N.2.58. Based on recent plunge in the share price of NB (-41.5% YTD), our FVE on the company translates to a BUY rating from a SELL in our last communicated report. On our numbers, NB trades at a forward P/E of 21.3x relative to 12.1x for Guinness.