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Initial View - Nigerian Breweries Plc - Tough operating environment drives Q3 loss

• Nigerian Breweries (NB) posted its Q3 18 result late yesterday, reporting a loss after tax of N3.6 billion (vs. after-tax profit of N259 million in Q3 17). The lackluster performance pared earnings reported in earlier quarters, as cumulative earnings for the nine-month period was down 38.9% YoY to N14.8 billion, translating to an EPS of N1.85 (vs. N3.03 in 9M 17). On its 9M 18 earnings, the company declared an interim dividend of N0.60 (-40% YoY), representing a dividend yield of 0.65% based on current pricing.
• Revenue slows on intense industry competition: Over the third quarter, NB reported weaker net revenue of N65.4 billion (-11.2% YoY) on account of lower revenue (-8.8% YoY) and higher excise duty expense (+31.2% YoY). On revenue, the major pressure point was volumes as its parent company – Heineken – in a media release stated that Nigeria’s beer volume declined high single digit, driven by increased competitive pressure. This reflects the recent opening of International Breweries (IB)  Sagamu plant which added ~2.5 million hectoliters to its existing capacity, enabling the company to increase its presence in the country beyond the south-west which in turn inflicted pressure on the market share of other sector players including Nigerian Breweries. Adding to its woes was higher excise duty rates (+36% YoY) which couldn’t be passed on to consumers, also due to the competitive pressure from IB. We recall that in Q2 18, NB reversed product price hikes on its mainstream products – Goldberg and Life – following IB’s strategy to keep pricing unchanged on its mainstream products – Hero and Trophy despite the hike in excise duty rates.
• Profitability margins contract sharply in Q3: In the review quarter, gross profit declined 26.5% YoY to N18.6 billion while related margin contracted 592bps to 28.5%. This was mainly due to a slower decline in cost of sales (-3.2% YoY to N46.8 billion) despite the high single digit slowdown in volumes. We attribute the slow decline in cost of sales to the 11.9% YoY increase in barley – which is largely imported – as well as loss of economies of scale on account of lower volumes sold. To add, we believe the contraction in gross margin was impacted by a further change in its product mix - in terms of more sales of mainstream than premium products. The reported weaker gross profit was unable to cover operating expenses (+0.7% YoY to N22.7 billion) incurred over the period, leading NB to report an EBIT loss of N3.9 billion (vs. operating profit of N2.98 billion in Q3 17). However, EBITDA remained positive at N3.8 billion (-65.6% YoY) while related margin contracted 906bps to 5.7%.
• Overall, we find NB’s third quarter performance disappointing and expect the trend of weaker margins to persist into the fourth quarter of 2018. It appears IB’s strategy to gain substantial footprint in Nigeria is to market beer products at affordable pricing and we believe this will continue to impact on profitability of NB via weaker sales volume and inability to hike product pricing, particularly for its mainstream products.
• Our last communicated FVE on Nigerian Breweries is N121.46 which translates to a STRONG BUY rating on the stock. NB trades at a current P/E and EV/EBITDA of 30.97x and 9.52x relative to Bloomberg Mena peer average of 27.2x and 15.85x.
• More analysis to follow.