Fx related costs weigh on earnings
- 13% / 10% reduction to our EPS forecasts and price target: Nigerian Breweries’ (NB) Q3 2017 PBT came in well behind our forecast, mainly because of negative surprises in gross margin, operating expenses and net finance costs. In addition to the mid-single digit y/y decline in unit volume, the management of Heineken (NB’s parent) disclosed that challenges with sourcing hard currencies exacerbated the pressure on costs. Given similar read-across from the (end-Sep) results of rivals, Guinness Nigeria and International Breweries, it appears that fx related costs remain a concern for the sector despite the overall improvement in fx liquidity post the introduction of NAFEX. Consequently, we have cut our EPS forecasts by around -13% on average over the 2017-19E period and our price target by -10% to N115.4. The downgrade to our earnings forecasts is mainly underpinned by a -5% reduction to our 2017-19E sales forecasts following an increasingly bearish outlook for beer demand as consumers continue to down-trade to economy brands. On a relative basis, the shares are trading on a 2017E P/E multiple of 30.9x for 42% EPS growth in 2018E. Although NB’s shares have shed around -16% since its Q3 2017 results were published (vs. +0.3% NSE ASI), the shares still imply a potential downside of -11.2% to our price target. Consequently, we retain our Underperform recommendation on the stock.
- Q3 2017 PBT down by 84% y/y: NB’s Q3 sales of N73.7bn grew by 13% y/y while PBT and PAT declined by -84% y/y and -75% y/y to N369m and N260m respectively. The y/y sales growth was completely offset by a combination of factors: 1) a -143bp y/y contraction in gross margin to 34.4% 2) a 16% y/y rise in operating expenses and 3) a 47% y/y growth in net finance costs. These negatives led to the significant y/y PBT decline. PAT declined by a softer margin due to a lower tax rate of 30% vs. a tax rate of 53% in the corresponding quarter of 2016. On a sequential basis, sales were down -18% q/q while PBT and PAT both declined by 98% q/q. The q/q sales decline is not surprising because of seasonality trends. The end-Sep quarter is usually one of the weaker quarters for the brewers. In addition to the q/q sales decline, Q3 gross margin contracted by -1,103bps q/q and completely offset a 25% q/q decline in net finance costs, leading to the weak bottom line.