As expected, the negative impact of the coronavirus pandemic reflected heavily on the operating performances of Nigerian Breweries Plc. Revenue plummeted by 21% YoY from N86.91bn in Q2’19 to N68.61bn in Q2’20.
The 21% revenue decline represents the highest revenue decline in the last seven years. Cost margin rose by 700 basis points from 58% in Q2’19 to 65% in Q2’20, despite a 12% YoY decline in cost of sales from N50.32bn in Q2’19 to N44.33bn in Q2’20. The higher cost margin, in our view, resulted from the impact of exchange rate devaluation.
Operating Expenses Managed, but Not Enough
Although operating expenses declined by 23% YoY from N26.46bn in Q2’19 to N20.29bn in Q2’20, operating profit nonetheless declined by 60% YoY from N10.41bn in Q2’19 to N4.13bn in Q2’20. The decline was due to a higher rate of decline in operating income (-34%) relative to operating expenses (-23%).
High Finance Costs Further Dampen Bottomline
Nigerian Breweries total borrowings spiked by 65% YoY from N2.45bn in Q2’19 to N4.06bn in Q2’20, owing to a higher level of borrowings as of H1’20. Total borrowings surged by 150% year-to-date from N55.72bn as of FY’19 to N139.35bn as of H1’20.
On a YoY basis, Nigerian Breweries’ total borrowings rose by 96% from an average of N49.68bn in H1’19 to an average of N97.54bn in H1’20. Based on our assessment, the significantly higher levels of borrowings was to maintain liquidity amid the impact of the pandemic which caused a disruption in cash flows.
Consequently, Nigerian Breweries’ profit before tax dipped by 99% from N7.95bn in Q2’19 to N69.77mn in Q2’20. Profit after tax also declined by 98% YoY from N5.29bn in Q2’19 to N83.91mn in Q2’20.
Outlook and Valuation
The Q2’20 actual earnings figures were much lower than projected, as the lockdown directive affected both the demand side and the supply side. We also note that one of the Group’s competitors, International Breweries Plc, reported a 25% revenue decline in Q2’20.
Considering current developments, we lower our FY’20E earnings per share (EPS) estimate to N0.29 (Previous: N1.30; FY’19 actual: 2.01). Owing to a revised (lower) cost of equity resulting from the dip in yields in the fixed income market, we arrived at a fair value of N34.53.
In our view, we expect the recovery to be slow even if the economy reopens. We also expect to see pressured margins due to the devaluation of the exchange rate. At the current market price of N32.00, the stock currently trades at an 8% discount to our fair value estimate.
Hence, we recommend a HOLD.
WSTC Securities Research