According to NB’s FY-2019 financial result, Revenue dipped marginally by 0.4% to N323.0bn amid continued pressures from the stepped-increment in excise duty, which most sub-sector players are yet to fully pass on to final consumers and sustained competition in the core lager segment. Meanwhile, due to pressures from higher marketing and finance costs, PBT and PAT fell sharply by 20.6% and 17.1%y/y to N23.4bn and N16.1bn respectively. We update our estimates for the brewer based on the recently published numbers and review our expectations for FY-2020 below.
Re-engineering the business model and maintaining market leadership: In FY-2019, NB recorded a second successive y/y decline in Net Revenue, down 0.4% (vs. FY-2018: -5.6%) to N323.0bn. This was like the overall competitive and regulatory landscape remained highly challenging. Though, according to the company’s management, Gross Revenue marginally improved in FY-2019. This was as the company intensified its promotional/advertisement campaigns in H2-19 – in a bid to regain some lost market shares. Notably, NB regained volume growth on both lagers (especially in the premium segment) and malt categories. Also, increases in product prices to major distributors in Nov-2019, without a corresponding increase in retail prices, supported the Gross Revenue number. However, further graduation in excise duties in Jun-2019 and the inability of the company to fully pass-on the increment to consumers, negatively impacted FY-2019’s Net Revenue numbers.
According to the parent company (Heineken N.V), AB-InBev’s International Breweries Plc (INTBREW) refusal to increase retail prices to reflect the increment in excise duties and more recently, Value-Added-Tax (VAT) increment, remain a big challenge for the other sector participants. Thus, to compete in the challenging environment the company reengineered its business model in Q4-2019, to operate at the current structurally low-price levels (relative to 5-years ago).
Accordingly, Cost of Sales which had risen by 2.3% y/y to N98.5bn as at H1-2019, fell by 2.9% y/y to N191.8bn in FY-2019, as raw material and consumables cost declined (-4.1% y/y), buoying Gross Profit (up 3.4% y/y). Consequently, Gross margin improved from 39.1% to 40.6%.
However, Operating Expenses (OPEX) rose 6.8% y/y to N97.1bn, driven by Marketing &
Distribution Expenses which expanded 10.8% y/y to N77.7bn while Administrative Expenses declined 6.7% y/y to N19.4bn. The rise in the Marketing & Distribution costs can be attributed to NB’s drive to recover lost market share while the decline in Admin. Expenses were on the back of the rightsizing activity carried out in 2018 that led to a 10.4% decline in total headcounts on the company’s book. Thus, Operating Profit fell by 4.6% y/y to N35.2bn.
Net Finance Cost spiked by 57.4% y/y to N11.9bn as Interest Expense rose by 53.5% y/y to N12.1bn. The higher Interest Expense was driven by an increase in Interest-Bearing Liabilities (up 26.5% y/y to N54.0bn) – the bulk of which was used to reduce the backlog of foreign payables. Overall, PBT and PAT fell by 20.6%y/y and 17.1%y/y to N23.4bn and N16.1bn respectively and net margin deteriorated from 6.0% to 5.0%.
Working Capital and Cash Analysis: A steep decline in cash
Looking at some of the components of NB’s Working Capital as at FY-2019, Inventory rose
18.5%y/y to N38.5bn while Trade and other Receivables declined sharply by 39.4%y/y to
N21.3bn. The growth in Inventory was attributed to inflation in prices of some inputs and
management’s strategy to return inventory levels to a more normalized level in 2019, to
prevent possibilities of stock-out. Meanwhile, the decline in Trade and other Receivables
reflects the company’s strong credit management policy. Trade and other Payables declined by 10.0% y/y to N102.8bn as the company paid down part of its foreign payables. In all, the current ratio weakened from 0.6x to 0.5x but still in line with a 5-year average of 0.5x.
However, analysis of the cash position showed that cash dipped by 57.0%y/y to N6.4bn,
dragged by 59.6%y/y rise in interest paid and further exacerbated by lower borrowings (-
60.7%y/y) during the period.
NB rated a BUY at current price: As expressed in our recently published 2020 Outlook
report – “A Different Playing Field”, our outlook for the NB remains modestly positive. We
expect the upward adjustments in major distributor’s prices in Nov-2019 to positively
impact the 2020 Net-Revenue numbers, due to the low-base price in the major part of
2019. Also, we expect NB to continue to benefit from the current uptrend in consumer
demand for premium beer brands in Nigeria (According to NB’s estimate, 1 out of 10
lager beer sold in Nigeria is an International Premium brand). However, the recent increase in prices late in Jan-2020, to fully reflect the incremental VAT, is not expected to have a significant impact on 2020’s Net-Revenue growth (VAT is net of Gross Revenue). Lastly, the expected launch of a new PET bottle line in April-2020 is positive for overall
volume growth during the period.
In all, we expect Net Revenue to rebound in 2020, especially as the graduating excise
duties on beer have now normalized. We assumed a 1.5% Revenue growth in FY-2020 with
a downside risk of a potential implementation of excise duties on carbonated drinks/soft
drinks that may negatively affect growth in the Malt categories. Also, we see the possibility for a stronger Net Revenue performance, especially if INTBREW agrees to join the other two players to increase retail prices of beer. A factor which we assume is less likely as we expect INTBREW to continue to maintain its price penetration strategy. Thus, we have not modelled this assumption.
Elsewhere, we believe the continued drive towards local sourcing of raw materials
(currently at 53.0%), especially sorghum, will remain positive for Cost of Sales. However,
the likely increase in electricity tariffs in Q1-2020 is expected to further add pressures on
NB’s operational cost. NB is likely to commit more resources to market and distributions
in 2020 amid our expectation for the competition for market share to remain intense in
2020. Also, with the financial impact of 2018’s rightsizing now fully utilized; we expect an
upward pressure in Administrative expenses in 2020. Meanwhile, we assume net finance
cost will come in lower, relative to 2019, amid our expectation for interest rates
environment to remain low.
Adjusting our model assumptions for all the above, we revise our year-end Target Price to
N56.6/share with a BUY rating on the stock.
United Capital Research