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Nigerian Breweries Plc FY 2018 - Bleak outlook as fresh pressure points kick in

• Following its FY 18 result, management of Nigerian Breweries Plc (NB) hosted an analyst call where it provided insight into the strategic outlook of the firm over 2019. Despite paucity of insights into the numbers, the key take-away was management’s guidance to raise product prices this year.
• Price hikes: a flattery or adulation? At its FY 18 analyst call, management guided to raising prices to provide buffer against the graduated excise duty (+17% to N0.35/cl) which commenced in January 2019. While the higher excise duty provides premise for a price hike, we think the decision to raise prices on its mainstream products cannot be done in isolation. Particularly, given the turn of events last year where NB reversed price hike on its mainstream – Goldberg and Life following IB’s decision to leave prices unchanged, we think NB’s decision to pass-on excise duty hikes to consumers lies with IB’s resolve to tow similar path.
• Mild revenue expansion in sight. On volumes, given that Mainstream and affordable beer which currently accounts for a major share of its volumes is in direct competition with IB’s Trophy and Hero – which contributes the most to IB’s volume, we still see scope for weaker volumes growth in its mainstream segment this year, albeit moderated compare to last year due to our expected improvement in consumer wallet coming from the proposed minimum wage increase from N18,000 to N27,000. In the premium segment, we remain optimistic of volume growth as Heineken continues to put up a good showing. Accordingly, we forecast a tamer 0.8% YoY growth in net revenue to N327.1 billion over 2019, lower than average revenue growth of 9% over the past five years.
• Scope for margin expansion. We forecast FY 19E cost of sales to decline 1.1% YoY to N193.2 billion following absence of one-off induced right sizing expense that drove Cost of goods sold (COGS) higher in Q4 18. In addition, our expectation for a slight recovery in volumes which paves way for a economies of scale is positive for COGS over 2019. Accordingly, we forecast gross margin expansion of 180bps YoY to 41% in 2019.
• In a bid to further entrench its market presence and channel its product directly to final consumers, management plans to sustain its Sell-in marketing strategy over 2019 which in our view would necessitate higher marketing expenses (+2.7% YoY). However, due to a faster expansion in gross margin we forecast a 100bps expansion in EBIT margin to 12.4%, lower than 5-year historical EBIT average of 18.2%. Over all despite our higher net finance cost on account of upward adjustment to borrowings, our forecast translates to FY 19E EPS of N2.58 (FY 18: N2.43). In line with historical trend of 100% dividend payout, we forecast dividend yield of 3%.
• We forecast higher finance expense over 2019. Following the drawdown of its revolving facility over 2018, we have raised borrowings by 6% to N43.5 billion. Coupled with expectation of slight depreciation of the Naira (we see a 3-5% depreciation this year) we raise our 2019E finance cost by 37% to N10.9 billion over 2019 and net finance cost of N10.6 billion. Over all despite our higher net finance cost on account of upward adjustment to borrowings, our forecast translates to FY 19E EPS of N2.58 (FY 18: N2.43). In line with historical trend of 100% dividend payout, we forecast dividend yield of 3%.
• Following adjustment to our forecast, we cut our FVE on NB to N75.82 (previous: N76.58) which translates to a SELL rating on the stock based on current pricing. On our numbers, NB trades at a 2019 P/E of 27.1x (5-year historical average of 33.6x) relative to Guinness of 18.96x.
• See attached for full report