Downgrading to Underperform
- Modest changes to our earnings estimates: International Breweries’ Q1 2018 (end-Jun) results were broadly in line with our estimates. It is worth mentioning that the net finance charge line surprised negatively but was offset by a positive surprise on the tax line. Given the in-line results, we have increased our earnings estimate by 3% on average over the 2018-19E period and our price target by 7% to N29.5. The shares are trading on a 2018E P/E multiple of 22.1x for EPS growth of 12.5% y/y in 2019E. This year, the shares have gained +83.8% and have significantly outperformed the broad index which is up +41.4%. We believe the rally has fully captured our positive outlook on the company. From current levels, the shares show a downside potential of -13.4% to our fair value estimate. As such, we are downgrading our rating on the stock to Underperform from Neutral.
- Pre- and post-tax profit in Q1 2018 vs losses in Q1 2017: Q1 2018 (end-Jun) sales of N9.4bn grew by 37% y/y. PBT and PAT of N1.5bn and N1.4bn compare with pre and post-tax losses of –N1.3bn and –N1.7bn recorded in Q1 2017 respectively. International Breweries posted an fx translation loss of –N2.7bn in Q1 2017. Stripping out this loss, Q1 2018 PBT and PAT advanced by 6% y/y and 31% y/y respectively. The strong sales growth and a -73% y/y decline in net finance costs more than offset a -411bp y/y gross margin contraction to 45.5% and a 15% y/y rise in operating expenses, leading to the strong bottom line. On a sequential basis, sales declined by -5% q/q, which we attribute to seasonality. The end-Jun quarter is usually one of the weaker quarters; PBT and PAT were down -37% q/q and -8% q/q respectively.
- Value brands remain in the front line: Following an average sales growth of 40% y/y during the four quarters in FY2017, sales grew 37% y/y in Q1 2018, confirming our view that value brands remain in the front line. We believe the shift to value brands will continue to bode well for the company even after the proposed merger with the other AB-InBev Nigerian Subsidiaries – Pabod Breweries and Intafact Breweries. Although the negative surprise in finance costs in Q1 2018 was material, we have increased our finance cost estimates over the 2018-19E period by only 7% because the variance (versus our estimate) was due to an fx translation loss of –N431m. Owing to improved fx liquidity in the market, we believe the risk of additional fx losses in the near term is minimal. We see FY2018 sales and adjusted EPS growing by 19% y/y and 36% y/y respectively.