In its unaudited Q1’20 results released recently, Nigerian Breweries reported a revenue figure of ₦83.2 billion, flat compared to Q1’19. Given the pressure from the pandemic at the tail end of the quarter, we see this revenue as decent and in line with estimated sector growth (INTBREW and GUINNESS’ domestic sales came in flat y/y). Although we note that the company recently increased pricing across its malt and beer segments, we believe that a significant boost may have come from looser credit policies evinced by the 33% q/q increase in Receivables.
Revenue, however, declined 4.72% q/q, coming off the seasonal Q4 high and reflecting the challenging end to Q1’20 owing to the start of social distancing in key cities across Nigeria. Looking forward, for as long as the pandemic lasts, we expect beer volumes to suffer considering that sizable demand from entertainment centres such as bars, lounges, clubs and hotels – which constitutes a substantial part of beer demand – would be significantly reduced. Furthermore, research from the World Health Organization attributing reduced immune levels to alcohol consumption should also prove to be a negative for beer consumption.
Although we expect the company’s innovativeness through discounts and strategic partnerships to drive sales in this period, we expect further depressed consumption levels and expect revenue to decline 29% y/y to ₦227.0 billion for the full year. Our view is based on the expected shrinkage to income as the economy suffers twin shocks from the reduced activity and the slump in oil prices.
Amid impressive cost-containment measures, gross margin also stayed relatively constant at 41.9%, rising 170bps q/q. It is interesting to note that despite the prevailing challenges to sales and distribution, marketing and distribution expenses grew 13.54% y/y to ₦18.8 billion, buoyed by a ₦2.1 billion increase in advertising and sales expenses, bringing EBIT down 22.3% y/y to ₦10.9 billion. Further down the EBIT line, Net finance costs grew 1.52% to ₦2.6 billion due to the issue of four commercial paper series worth ₦93 billion to support short term funding needs. We believe that this was a strategy to restructure its debt, taking advantage of the interest rate realities; this supported a 4x growth in cash balance. All in, PBT and PAT came in 28% y/y and 31% y/y lower at ₦8.2 billion and ₦5.5 billion respectively.
PAT expected to drop to ₦5 billion, TP estimated at ₦39.25
Adjusting our full-year cost estimates in line with the current and expected realities, we expect the significant contraction in sales volume to drive a 113bps decline in gross margin to 39.5%, this translates to a full-year gross profit forecast of ₦89.7 billion. Furthermore, we estimate a 50.2% y/y decrease in operating profit to ₦17.0 billion driven by a 300bps reduction in operating margin. We adjust our finance cost estimate to reflect the series 7 and 8 commercial papers and project a PBT of ₦8.6 billion and a PAT of ₦5.8 billion, (a 20.6% y/y and 17.1% y/y decline respectively). Our target price is revised downwards to ₦39.25 per share and we issue a HOLD recommendation.