Neutral rating maintained
· Increase to earnings estimates and price target: International Breweries’ Q4 2017 (end-Mar) results surprised positively mainly because of better-than-expected sales and gross margin. As such, we have increased our earnings estimates over the 2018-19E period by 47% on average and our price target by 53% to N27.5. The increase to our price target was limited by our decision to increase our risk free rate assumption by 100bps to 15.5%. International Breweries shares are trading on a 2018E P/E multiple of 18.0x (for EPS growth of 13.7% y/y in 2019E) and close to our fair value estimate of N27.7. This year, the shares have gained +40.8% (NSEASI: +25.8%) and +65.9% in the last three months (NSEASI: 33.0%). We believe the rally in the last three months adequately captures the improved outlook we see. As such, we have retained our Neutral rating on the stock.
· PBT growth of 89% y/y in Q4 2017: Q4 2017 (end-Mar) sales of N10.0bn grew by 47% y/y, while PBT and PAT advanced by 89% y/y and 56% y/y to N2.4bn and N1.5bn respectively. Although operating expenses more than doubled to N1.7bn from N769m in Q4 2016, this negative was more than offset by the strong y/y sales growth and a 747bp y/y gross margin expansion to 43%, and led to the strong bottom line. On a sequential basis, sales grew by 8% q/q, while PBT and PAT advanced by 17% q/q and 2% q/q respectively. We attribute the softer q/q sales growth (versus the y/y sales growth) to seasonality. The end-Mar quarter is usually one of the weaker quarters for brewers.
· Outlook still positive: International Breweries reported average y/y sales growth of 40% during the four quarters of 2017 which we attribute to both volume and pricing. Continued down-trading by consumers to cheaper brands has been beneficial to the company. Recently, International Breweries announced plans to merge with the other two AB-InBev Nigerian Subsidiaries – Pabod Breweries and Intafact Breweries, which we believe should be concluded by next year. We expect that the company will continue to benefit from the ongoing product shift in the market before and after the merger (the other two subsidiaries also engage in the manufacture of alcoholic and non-alcoholic beverages in the value segment). However, we have no additional details to incorporate the new entities in our valuation for now. Our only concern is the company’s long term funding strategy given its exposure to foreign loans and high interest-bearing short term debt. For 2018E, we see sales and adjusted EPS growing by 17% y/y and 28% y/y respectively.