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Nigerian Breweries Plc Q4 20 - A disappointing end to the year

A disappointing end to the year

• Similar to what we saw in Q320, Nigerian Breweries (NB) recorded a strong YoY growth of 18% in their revenue which printed at N103 billion over Q420. However, cost of sales grew by an astonishing 42% which dragged gross profit down by 18%YoY to N28.74 billion. Despite a 14%YoY fall in OPEX, the sharp increase in cost of sales meant that EBIT fell 30%YoY to N7.11 billion. Higher finance costs led net finance expense higher by 67%YoY which in turn helped bring PBT lower by 90%YoY to N599 million.
• Rising costs overshadow revenue growth: Revenue grew for a second consecutive do you mean second consecutive quarter in Q420 by 18%YoY to print at an impressive N103 billon. The price increase from earlier this year most certainly played a part in the higher revenue but until we speak to management during their conference call it is tough to determine what role, if any, quantity played during the quarter. However, the main story from the top line is the 42%YoY growth in cost of sales to N74.26 billion. This gives a cost-to-sales margin of 72% which is comfortably the highest NB have reported in the past 8 years. Leading this rise in costs was a 39%YoY increase in the cost of raw materials to N50 billion, a result of the rising inflation and currency depreciation. There was also a charge of N5.42 billion for variable lease expenses which was not there last year while the cost for repairs and maintenance doubled to N4.95 billion. Gross profit fell 18%YoY to N28.74 billion which translates to a margin of 28% (Q419: 40%).
• While cost of sales is seemingly spiralling out of control, NB appear to have a firm grip on OPEX which declined on a YoY basis for the 3rd consecutive quarter. In Q420, OPEX declined by 13.5%YoY to N21.87 billion, a margin of 21% (Q419: 29%). This fall came as both S&D (-8.2%YoY) and administrative costs (-34.4%YoY) declined over the period. EBIT printed at N7.1 billion, a 29%YoY fall when compared to Q419’s N10.03 billion, which represents an EBIT margin of 7% (Q419: 12%).
• NB’s net finance cost rose 67%YoY to N6.52 billion following the undesirable combination of declining finance income (-7.2%YoY) and rising finance expense (+66.4%YoY). The former was as a result of lower interest from bank deposits while the latter arose from a higher net loss on FX transactions and interest on lease liabilities. These led PBT lower by 90%YoY to N599 million while PAT was lower by 93%YoY at N429 million.
• Combing through the balance sheet we see that NB halved their receivables QoQ to N11.42 billion while payables rose by 25% to N139.2 billion. Cash and cash equivalents fell by 44% between the end Q320 and Q420 to N30.37 billion on the back of higher VAT paid and  acquisition of PPE. Elsewhere, deposit for imports, which represent Naira deposits for foreign currencies purchased for funding of letters of credit and forwards, almost quadrupled to N11.58 billion (Q320: N3.76 billion).
• Our current FVE for Nigerian Breweries is N53.20 but after getting clarity from management on these results during their conference call this Friday we will likely be adjusting our estimates. In the meantime, we place a NEUTRAL recommendation on the stock.