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Late last week, the NSE published International Breweries’ Q4 2017 (end-Mar) results which surprised positively. While sales of N10.0bn grew by 47% y/y, 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 the brewers. Despite a -459bp q/q gross margin contraction and a 149% q/q increase in net finance charges, PBT advanced by a wider margin because of an -18.3% q/q decline in operating expenses and a swing from negative to positive on the other gains and losses line.
On a full year basis, sales of N32.7bn grew by 41% y/y. However, PBT and PAT declined by -21% y/y and -61% y/y to N2.9bn and N1.0bn respectively.
Compared with our estimates, Q4 sales were ahead by 18% while PBT and PAT were significantly ahead. The main reason for the variance was the positive surprise on the gross margin line.
The macroeconomic challenges that have been apparent since 2014 have been further compounded by issues surrounding fx liquidity. The squeeze on household wallets has led consumers to down-trade further to much cheaper brands. Consequently, the likes of International Breweries – which operates solely in the value segment –have been favoured. Last week, the company announced plans to merge with the other two Nigerian AB InBev indirect subsidiaries – Pabod Breweries and Intafact Breweries.
Whilst we expect more details from management, we believe the company is planning to leverage on cost synergies. The two companies, which are smaller than International Breweries, also engage in the manufacture of alcoholic and non-alcoholic beverages in the value segment and should also benefit from the structural changes in the sector.
Given the stronger-than-expected set of numbers, we expect to see cautious upward revisions to consensus FY 2018 (end-Mar) estimates. We expect that the market will react positively to these numbers initially. However, the market’s reaction may be limited by the fact that the firm has decided not to declare a dividend for the FY 2017 period.
Year to date, International Breweries shares have gained 74%, significantly outperforming the broad index which is up 24%.