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NIGERIAN BREWERIES PLC H1'18 - Excise Duties Kick Off, Tougher Outlook For FY’18

Excise duties kick off, tougher outlook for FY’18                                                                              

Nigerian Breweries reported an 8% q/q rise in net revenue in Q2’18, below our 12% growth expectation. As such, H1’18 net revenue came in marginally behind our estimate and 5% lower y/y. We believe volume growth continued to struggle in the quarter amidst sustained weakness in consumer demand as well as rising competition in the beer market. H2’18 is expected to be an even tougher period to grow volumes for NB amid implementation of the first phase of the FG’s excise duties on alcoholic products. Notably, whilst NB took selective price increases in May and June, the company has reportedly rolled back this pricing action in July in a bid to compete effectively with a major competitor that left prices unchanged. Meanwhile, we note that NB reported an estimated excise duty expense ₦11 billion for the H1’18 period, taking gross revenue to ₦184 billion.                                                                              

We expect volume growth to remain tepid in the second half of the year amidst constrained beer spend and intense competition. Meanwhile, Nigerian Breweries’ parent company also reported lower malt volumes in Nigeria for H1’18, a sign that the rout is also visible in the non-alcoholic segment. Though pricing actions from the company may be slightly erratic, we believe NB may be looking to preserve market share, particularly in the mainstream beer segment, in the near term. Overall, we revise our FY’18 net revenue estimate 4% lower to ₦339 billion as the slower volume rollout offsets mid-single digit increase in average prices for the year. Adjusting for the margin pressure observed in this period, we cautiously revise our gross margin estimate 100bps lower to 44% and raise OPEX to sales marginally to 26%. Whilst FX loss came in lower than we expected in Q2’18, we retain our ₦4 billion estimate for FY’18 (H1’18: ₦2 billion). All in, our FY’18 profit after tax forecast is revised downward to ₦34 billion (Previous: ₦39 billion) – translating to a mild 2% y/y growth, supported by the low base in H2’17. Having also cut our FY’19 revenue growth estimate to 7% (Previous: 11%) amidst a tougher outlook for the beer market, our 12-Month Target Price is revised lower to ₦121.77 (Previous: ₦130.68). We retain a BUY rating on the stock.                                                                           

Nigerian Breweries Plc (NB) is the largest brewer in Nigeria and the second largest listed company on the Nigerian Stock Exchange. Following the merger with Consolidated Breweries effective December 2014, parent company, Heineken maintains a 53% controlling stake in the larger entity. NB dominates Nigeria’s brewery market with a c.60% market share and a brand portfolio that includes lager beer, stout beer, non-alcoholic malt drinks, carbonated soft drinks and ready-to-drink brands.