Nigerian Breweries Plc reported strong earnings in Q3’2020. Revenue grew by 26% year-on-year (YoY) from N65.49bn in Q3’2019 to N82.23bn in Q3’2020. The Group’s operating profit grew by 949% YoY from 709.65mn in Q3’2019 to N7.44bn in Q3’2010. Profit before tax by 220% YoY from a loss of N2.19bn in Q3’2019 to a profit of N2.63bn in Q3’2020. Profit after tax grew by 229% YoY from a loss of N1.04bn in Q3’2019 to N1.35bn in Q3’2020.
Nigerian Breweries Plc declared an interim dividend of N0.25 (9M’2019: N0.60), to be paid on December 1, 2020. The qualification date for dividend payment is November 20, 2020.
Gradual Economic Reopening Drive Increased Demand
We attribute the 25% YoY revenue growth in Q3’2020 to increased volume during the period, following the relaxation of lockdown and movement restrictions by the national authorities, to contain the spread of the coronavirus pandemic. We note that the lockdown and stay-at-home policy negatively impacted sales for brewers, as reflected in the 21% YoY revenue decline in Q2’2020.
We also believe that an improved mix, where the Group sold more of the higher-margin premium products (Heineken brand), drove the topline growth. Also, we posit that there were price increases during the period to reflect higher costs incurred.
Higher Costs Amid Exchange Rate Devaluation
Nigerian Breweries’ cost of sales rose by 26% YoY from N40.97bn in Q3’2019 to N51.42bn in Q3’2020. Although the Group claims to source 60% of its raw inputs locally, there are still significant exposures to the exchange rate. Hence, the higher costs incurred during the period suggests that the exchange rate devaluation by the monetary authorities affected the cost of some imported raw inputs. Expressly, the cost of raw materials and consumables grew by 44% YoY in Q3’2020.
However, owing to the proportionate increase in revenue, cost margin remained flat at 63% in Q3’2020. As a result, gross profit rose by 26% YoY from N24.52bn in Q3’2019 to N30.81bn in Q3’2020.
Cost Optimisation Widen Bottomline Growth
Operating expenses declined by 2% YoY from N24.17bn in Q3’2019 to N23.61bn in Q3’2020. The decline in operating expenses majorly resulted from an 8% YoY decline in marketing and distribution expenses from N19.32bn in Q3’2019 to N17.82bn in Q3’2020. We believe that the lower economic activities due to the coronavirus pandemic resulted in a decline in marketing expenses.
On the other hand, Nigerian Breweries’ administrative expenses rose by 20% YoY from N4.85bn in Q3’2019 to N5.79bn in Q3’2020. Therefore, operating profit surged by 949% YoY from N709.65mn in Q3’2019 to N7.44bn in Q3’2020.
Increased Borrowings Drive Finance Cost Up
Nigerian Breweries’ total borrowings rose by 64% YoY from an average of N57.75bn as of 9M’2019, to an average of N94.63bn as of 9M’2020. Consequent to the significant rise in total borrowings, finance cost grew by 68% YoY from N2.93bn in Q3’2019 to N4.91bn in Q3’2020. Nonetheless, profit before tax grew by 220% YoY while profit after tax grew by 229% YoY.
Overall, higher revenue, posited to be driven by volume and price growth, was the core driver of performance in Q3’2020. Operating efficiency further enhanced the Group’s bottom-line growth.
Financial Statement Summary
The actual Q3’2020 earnings result was significantly better than we anticipated. Although we expected to see a recovery in the Group’s topline, we posited a slower improvement. We believe that Q4’2020 will be relatively strong; therefore, we think that Group will sustain its topline performance in Q4’2020.
We revise our FY’2020 EPS estimate upwards to N1.64 (previous N0.29), to reflect our improved outlook of earnings in FY’2020. Based on our improved outlook for earnings and cash flows, in combination with a lower cost of equity, we arrived at a fair value of N59.13. At current market price, we believe that the stock offers a total return of 17%. Hence, we upgrade our recommendation to BUY.