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Q2 2016 earnings review: Challenging macro weighing on performance

​Challenging macro weighing on performance

• Modest cuts to our earnings forecasts: Following International Breweries' Q2 2016 results which surprised negatively, we have cut our earnings forecasts by 10% on average for the 2016-17E period. However, we have trimmed our price target by a slimmer margin of 2% mainly because we have reduced our risk free rate assumption by 250bps to 13%. We increased our capital expenditure forecasts for the next two years on the back of the company's plans to reach a capacity of 2 million hectoliters (hl) within the next 15-18 months. We estimate that the company is now operating at a capacity of around 1.8mhl. The increased capex forecast also contributed to the cut to our price target. Year-to-date, International Breweries shares have shed -29.4%, underperforming the broad index which has shed -18.8%. From current levels, the shares are trading on a 2016E P/E multiple of 27.3x for a 12.5% y/y EPS growth in 2017E. The shares are trading very close to our N16.4 price target; we have retained our Neutral rating on the stock.

• No obvious positives in Q2 2016 results: Q2 2016 results showed that sales were flattish y/y, while PBT and PAT both declined by wider margins of -60% y/y and -56% y/y to N381m and N284m respectively. The y/y decline in profitability was due to a combination of factors: a -437bp y/y gross margin contraction to 50.5%, a 16.3% y/y rise in opex and a finance cost increase of 166.5% y/y. Although global average prices over the July - September period for sugar and maize (raw materials) declined by around 30% y/y and 3% y/y respectively, it appears that the price declines were more than offset by the devaluation of the naira and led to the gross margin contraction. On a sequential basis, while sales were down by -5.9% q/q, PBT and PAT declined by -38.4% q/q and -32.5% q/q respectively.

• Near term outlook: International Breweries' Q2 results were weighed down mainly by gross margin contractions and elevated finance costs. Given the challenges in sourcing fx, we do not see gross margins showing any meaningful improvement in the near term unless raw material prices decline enough to offset fx losses. The company's cost of debt increased by 800bps last quarter. As such, we expect finance costs to remain elevated. Consequently, we have modeled a -6.4% y/y decline in PAT in 2016E.