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Initial View - Nigerian Breweries Plc - Cost pressures mar earnings

• Nigerian Breweries released Q1 2019 earnings late yesterday, which confirmed our view of further hurt to earnings from excise duty which took effect in June 2018, given the intensive competition in the breweries space which limits the ability of players to transfer the full impact to consumers. Coupled with increases in raw materials (Barley specifically) and higher marketing spend, NB’s Q1 2019 profit after tax contracted 21.3% YoY to N8.03 billion (EPS: N1.00).
• Higher excise duty erodes higher sales: Over the first quarter of 2019, revenue grew 3% YoY to N91.4 billion. This reflects double digit growth in its premium brand and beer volume. Specifically, Q1 19 trading update from its parent company guided to double digit growth in Heineken brand. In the beer segment volume grew mid-single digit during the quarter. However, following higher excise duty (+48% YoY to N8.1 billion) over the period, net revenue grew 0.4% YoY to N83.3 billion.
• Higher raw material and operating costs depress margins: Reflecting limited pass through of the higher excise duty to consumers and increase in production cost (+7.3% YoY to N48.3 billion) over the quarter, a fallout of increase in global barley prices (+9% YoY), gross profit declined 7.8% YoY to N35.1 billion with related margin contracting 460bps YoY to 38.4%. In addition, the company also faced cost pressure from its operating activities as OPEX rose 2.8% YoY to N21.2 billion over Q1 19. This mainly reflects higher selling and distribution expenses, which in our view echoes management’s marketing and promotional efforts to support volumes. Consequently, EBIT dipped 20.4% YoY to N14.1 billion while related margin contracted 460bps to 15.4%.
• Despite the lower interest rate environment, finance expense rose 6.4% YoY to N2.6 billion over the period. This was driven by 8% YoY expansion in loans and borrowings to N44.3 billion. Consequently, PBT and PAT declined 24.9% and 21.3% respectively to N11.5 billion and N8 billion respectively.
• In our stock update published last month (See report: ), we guided to a strong growth in Heineken volumes as well as slight recovery in its Mainstream and affordable beer to support revenues (+0.8% YoY) over 2019. Accordingly, our expectation for higher volumes which paves way for better economies of scale informs our 1.1% moderation in cost to sales over 2019 (N195.3 billion) which translates to a gross margin expansion of 120bps YoY to 40.3% over 2019. We also raised our 2019 finance cost by 37% YoY to 10.9 billion over 2019. With key lines in NB’s Q1 19 earnings tracking in line with our estimates, we leave our FVE unchanged for Nigerian Breweries at N75.82 which now translates to an OVERWEIGHT (Previously: SELL at market pricing of N80.00) rating given current pricing (declined 25% since our last update). NB trades at a current P/E of 25.19x relative to Guinness and Bloomberg Mena peer average of 15.14x and 18.94x respectively.