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Nigerian Breweries Plc Q3 17 - Little cause for cheer

• Nigerian Breweries Plc (NB) released its unaudited 9M 17 financial statements, wherein revenue rose 14.4% YoY to N222.7 billion and EPS surged 19.4% YoY to N3.03. However, Q3 17 result revealed significant deterioration in earnings with PBT and PAT plunging 84% and 75% YoY to N369 million and N260 million respectively—their lowest levels on record. Nevertheless, in line with its tradition, NB declared an interim dividend of ₦1 per share which implies a dividend yield of 0.7% using last trading price of ₦152.
• Looking through the result, we note that input cost pressures remained in the quarter with growth in COGS (+15% YoY) outpacing that of revenue (+13% YoY). According to a trading update provided by the parent (Heineken NV), Nigerian volumes declined by mid-single digit in the quarter even as underlying business conditions remained difficult and consumers continued to trade down. Consequently, gross profit declined 24% YoY to N4 billion—the lowest on record while related margin slid 1.44pps YoY to 34.4%.
• NB also faced pressures from higher operating cost (+16% YoY to N2.6 billion), whose growth also outpaced that of sales. Management linked operating pressures to efforts at stimulating volumes in an industry with intense competition. The foregoing and elevated input cost underpinned a steep decline in operating profit to a record low of N2.8 billion (-83.2% YoY). Further contributing to NB’s weak performance was a 47% YoY surge in net finance expense to N2.6 billion which reflected higher effective rates on outstanding debt (+400bps YoY to 9%). Overall, these pressures redounded in NB’s weakest quarterly earnings on record.
• For FY 17, we still hold the view that margins will be subdued as depressed real income levels, intense industry competition, weaker volumes as well as NB’s relatively more expensive product portfolio mix guides to continued expansion in the share of value beers in the volume mix. That said, higher prices and lower FX losses, relative to 2016, should drive stronger earnings performance in the current year. Nevertheless, NB remains expensive relative to trend levels and peers and currently trades at a P/E of 37x compared to Bloomberg Middle and East Africa Peers at 30.9x. We therefore retain our SELL rating on the stock with a FVE of N130.75.