Nigerian Breweries Q4 2020 Results Review: Cost Pressures Weaken Fundamentals

Nigerian Breweries Generated N6.9 Billion PAT… Declared 25 Kobo Interim Dividend
Nigerian Breweries Generated N6.9 Billion PAT… Declared 25 Kobo Interim Dividend -

…4% Cut To Our EPS Forecasts Over The ’21-22f Period

We have cut our EPS forecasts over the ’21-22f period by 4% for Nigerian Breweries (NB) after a weaker-than-expected set of Q4 ’20 results. We now have a new price target of NGN45.3, down by around 9%. Our forecasts reflect the potential impact of rising input prices and fx devaluation on raw materials. We maintain our Underperform rating on NB.

On fundamentals, we expect the average price of NB’s portfolio to be higher in ’21f after management increased prices in March ’21.

We believe further price increases are necessary in ’21 to offset successive years of muted prices. We also expect volumes to rise (+3.0% y/y) due to noticeable improving demand in the premium segment (especially Heineken and Tiger). We consequently project sales of N352.4bn in ’21f, rising by 4.5% y/y.

We would also be closely watching for customer adoption of two products launched by NB in 2020: Desperadoes (tequila infused beer) and Climax (energy drink). We raised our cost of sales forecast to N225.5bn, implying a contraction of 550bps to our gross margin forecast to 36% from a prior estimate of 42%. This follows the significant decline in gross margin to 28% in Q4’20, down -1226bps y/y.

Further down the P&L, we expect interest expense to decline by -23.2% y/y to 14.0bn (-11.8% vs our prior forecast) as prior CPs issued in 2020 mature (NB issued multiple CPs to shore up working capital and refinance short term debts in 2020). We think NB’s CP issuances will be less aggressive in 2021, considering the change in the dynamics of Nigeria’s fixed income market, amidst rising yields. Based on this, ’21f PBT is forecast at NGN18.8bn (+62% y/y and -9.5% vs. prior forecast) while PAT is estimated at NGN12.8bn (-12.1% against prior forecast).

This implies an EPS of NGN1.53 (+78.7% y/y, but a -12.2% cut from prior EPS forecast). We see room for readjustments in our estimates, on the condition that NB delivers a stellar set of operating results in Q1 ’21. At current levels, NB is trading on a ’21f P/E of 32.8x (global average of 23.4x) and EV/EBITDA of 6.7x (vs. global average of 19.2x). Year-to-date, NB shares have shed -10.5% vs. the ASI’s -3.5%. 

Cost pressures weigh on EPS in Q4 ’20

NB’s sales grew by +18.0% y/y to NGN103.0bn (vs. our N89.3bn estimate). However, a 42.1% y/y increase in cost of sales (to NGN74.3bn) and 67.1% y/y increase in interest expenses (to NGN6.5bn) led to an EPS of NGN0.05 (vs N0.48 in Q4 ’19). NB has announced a final dividend of 69kobo. Shareholders could opt to receive shares (scrip dividend) in place of cash. This will result in an increase in shares outstanding. However, on an assumption that all shareholders subscribe to the scrip dividend, NB could save NGN5.5bn in cash which could be channeled to capex and/or working capital needs. NB’s AGM is scheduled for 22 April 2021.