Nigeria Breweries Earnings Review: Excise pressures and high leverage weighs on 9M profit

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  • A decline in net revenue by 1.0%
  • Margins are thinner and this impacts on profits
  • A dividend of N 0.50/s declared and translates to a dividend yield of 1.1%
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Excise duty pressures Net Revenue lower

In its recently released 9M numbers, Nigerian Breweries’ (NB) reported a marginal 1.0%y/y decline in Net Revenue (Gross Revenue less excise duty payments) to N235.7bn in 9M 2019 from N238.1bn in 9M 2018. Implementation of the second phase of the Ad Valorem excise duty system underpinned the decline in Net Revenue. Gross Revenue was higher by 1.9% y/y, but excise payments surged 43.2% y/y to N24.2bn. Excise to Gross Revenue ratio came in at 9.3% in 9M 2019 as against 6.6% in 9M 2018. On a q/q basis, the seasonal impact of fewer festivities weighed as Net Revenue fell 24.7% q/q to N65.5bn in Q3 2019 from N86.9bn in Q2 2019 (Q3 2018 – N65.4bn).

Gross Margin recovers on lower Raw material cost

Surprisingly, Cost of Sales fell 2.7% y/y to N139.5bn in 9M 2019 from N143.4bn in 9M 2018. The decline in Cost of Sales was driven by a 4.4% y/y decline in raw materials cost which was surprising considering the high price environment for raw materials like barley. The faster decline in Cost of Sales fed into improved gross margin which strengthened 1.0ppts to 40.8% as at 9M 2019. Gross Profit climbed higher by 1.5% y/y to N96.2bn in 9M 2019 from N94.7bn in 9M 2018. On a q/q basis, Gross Profit fell 33.0% to N24.5bn in Q3 2019 from N36.6bn in Q2 2019.

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Opex jump on higher advertising costs

Operating Expenses climbed higher by 6.1% y/y to N71.8bn in 9M 2019 from N67.6bn in 9M 2018. The rise in Operating Expenses was driven by an 11.7% y/y rise in Marketing & Distribution Expenses due to a 21.7% y/y climb in Advertising Expenses as Nigerian Breweries fights for lost market share. On the other hand, Administrative Expenses recorded a double-digit decline of 11.7% y/y 9M 2019 due to reduction in staff headcount following the right-sizing exercise done last year.EBITDA edged lower by 2.4% y/y to N49.7bn in 9M 2019 from N50.9bn in 9M 2018 due to higher Opex while EBITDA margin slipped lower by 0.3ppts y/y to 21.1% in 9M 2019.

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Commercial paper issuance drives finance cost higher

Net Finance Cost jumped 51.0% y/y to N8.0bn in 9M 2019 from N5.3bn in 9M 2018 on the back of lower Interest Income (down 4.2% y/y to N0.2bn) and higher Interest Expense (up 48.6% y/y to N8.2bn). NB’s higher Interest Expense was driven by higher Interest-Bearing Liabilities (up 70.9% y/y to N72.8bn) due to the recent Commercial Paper issuances done by the company to finance working capital. While Tax Expense declined 35.6% y/y to N4.9bn, Net income slumped 17.0% y/y to N12.3bn in 9M 2019 from N14.8bn in 9M 2018. We note the company recorded a loss of N1.0bn in Q3 2019 which was lower than the loss made in Q3 2018 (N3.6bn) due to lower revenue occasioned by seasonality.

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NB declares interim dividend…The yield of 1.1%

The company declared a dividend of N0.50/s which translates to a dividend yield of 1.1% based on Monday’s closing price of N46.05/share.

Overall view – Excise pressure may force the price hike

Following the implementation of the second phase of the Ad Valorem excise regime, margins have grown significantly thinner, which is impacting on profits. While consumer pockets may be pressed, we believe Nigerian Breweries would have to raise beer prices in order to grow profitability. The loss-making position of the main competitor, International Breweries, may encourage NB to raise prices given IntBrew is expected to follow suit.

We have a Target Price of N55/s and we maintain that investors should hold.

Nigeria Breweries Earnings Review: Excise pressures and high leverage weighs on 9M profit

Nigeria Breweries Earnings Review: Excise pressures and high leverage weighs on 9M profit

FSDH RESEARCH

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