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Initial View - Nigerian Breweries Plc Q4 2018 - Intense competitive landscape plunge earnings

• Full-year 2018 result of Nigerian Breweries (NB) released this morning showed EPS decline of 41.2% YoY to N2.43 (2017: N4.13) largely on the back of decline in gross profit (-11.6% YoY to N127 billion) which masked the moderation in operating expense (-2.5% YoY to N90.8 billion). Notwithstanding, the company declared a final dividend per share of N1.83 which in addition to the interim dividend of N0.60 amounts to a total dividend of N2.43 (vs. N4.13 in FY 17). Final dividend implies a dividend yield of 2.2% based on last trading price.
• Contrary to the N3.7 billion loss posted in Q3 18, the company returned to profit in Q4 18 with EPS of N0.58. However, in relation to same period in the prior year, Q4 18 EPS is down 48.6% YoY due to higher cost of sales (+2.1% YoY to N54.1 billion) and higher operating expenses (+4.4% YoY to N23.2 billion).
• In line with trend over the last five quarters, NB revenue decline 4% YoY to N95.2 billion, which adjusted for the higher excise duty expense (+56% YoY to N8.9 billion) resulted in lower net revenue ( -0.4% YoY to N95.2 billion) over Q4 18. On revenue, the pressure points remain volumes as its parent company in a media release stated that while the main Premium product (Heineken) grew double digit in Nigeria, Low and Non-Alcoholic volumes were adversely impacted by the weak macroeconomic environment and SKU rotation. This in our view reflects the stiff competition from International Breweries (IB) which impacted beer volumes for NB and limited scope for price hikes in the wake of higher excise duties.
• Reflecting the limited scope for pass-through of the higher excise duty to consumers, gross profit declined 12.7% YoY to N32.2 billion while related margin contracted 720bps to 33.8%. This was mainly due to higher cost of sales (+2.1% YoY to N54.1 billion) – a reflection of the 11% YoY increase in barley, which is largely imported – as well as loss of economies of scale on account of lower volumes sold. In addition, the company also faced cost pressure from its operating activities as OPEX rose 4.4% YoY to N23.2 billion over Q4 18. This mainly reflects higher selling and distribution expenses, which in our view echoes management’s marketing and promotional efforts to support weakening volumes. Consequently, EBIT dipped 37.9% YoY to N9.2 billion while related margin contracted 680bps to 9.7%.
• Our last communicated FVE on Nigerian Breweries is N76.58 which translates to a SELL rating on the stock. NB trades at a current P/E of 26.08x relative to Guinness and Bloomberg Mena peer average of 18.23x and 24.5x respectively.