International Breweries’ Q1 2021 Margins Remain Weak Despite Topline Growth

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International Breweries recorded double-digit revenue growth of 10% YoY to N38.96bn in Q1 2021 from N35.35bn in Q1 2020 driven by improved sales volume. Cost of sales rose by 11% YoY to N32.48bn in Q1 2021 from N29.18bn in Q1 2020. Due to the rise in the cost of sales, gross profit grew at a slower rate of 5% to N6.49bn in Q1 2021 from N6.17bn in Q1 2020.

The operating loss in Q1 2021 stood at N2.49bn representing a 4% increase from a N2.39bn operating loss in Q1 2020. However, the loss before tax improved by 54% to N3.56bn in Q1 2021 from N7.69bn in Q1 2020.

The improvement in the loss before tax was due to a decline in both finance cost and other losses. Likewise, loss after tax improved by 54% to N2.58bn in Q1 2021 from N5.65bn in Q1 2020.

International Breweries

Amortisation of Container Bloats Cost of Sales

We believe that the double-digit cost of sales growth recorded in Q1 2021 resulted from an increase in sales volumes, as cost margin remained flat at 83% (Q1 2020: 83%). During the quarter, International Breweries incurred a higher amortisation charge of containers.

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The amortisation charge relates to returnable containers, where provisions were made for breakages and losses in trade over the expected useful life of the container. Specifically, the amortisation charge rose by 117% YoY to N4.56bn in Q1 2021 from N2.10bn in Q1 2020.

If we discounted the amortisation charge as a one-off expense, the cost of sales could have risen by just 3% YoY to N27.92bn in Q1 2021 from N27.08bn in Q1 2020. Nevertheless, gross profit grew by 5% YoY to N6.49bn in Q1 2020 from N6.17bn in Q1 2020.

Macroeconomic Challenges Reflects in Operating Expense

Operating expense rose by 5% YoY to N8.98bn in Q1 2021 from N8.56bn in Q1 2020. The higher operating expense was driven by a 14% hike in business running cost to N2.04bn (Q1 2020: N1.80bn). We attribute the hike in business running cost to increased inflationary pressures. The higher operating expense, therefore, resulted in a 4% YoY rise in operating loss to N2.49bn in Q1 2021.

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Deleveraging Effort Amid Better FX Management Buoys Loss Position

International Breweries’ loss before tax improved by 54% YoY to N3.56bn in Q1 2021 from a loss of N7.69bn in Q1 2020. The improved loss position was driven by a decline in finance cost and other losses. Finance cost dipped 30% to N684mn in Q1 2021 from N984mn in Q1 2020. The lower finance cost underpinned the management’s deleveraging efforts through a capital raise in January 2020.

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Also, other losses declined significantly by 97% YoY to N168mn in Q1 2021 from N5.64bn in Q1 2020. Notably, realised net foreign exchange loss improved to N301mn in Q1 2021 from N4.69bn in Q1 2020 while unrealised net foreign exchange gain improved to N81mn in Q1 2021 from a loss of N5.25bn in Q1 2020.

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We believe that International Breweries hedged better within the period. Therefore, the combination of lower finance cost and improved other losses resulted in the improved loss before tax to N3.56bn in Q1 2021 from N7.69bn in Q1 2020.

Financial Performance Summary

International Breweries
Source: Company Accounts, WSTC Research

Outlook

We expect that revenue growth would be sustained in the short to medium term, premised on increased sales volume. We posit that the sustained economic recovery would drive the increase in sales volume. We also expect to see sustained cost optimisation in a bid to protect earnings margins.

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Using a blend of Discounted Cash Flow model, Residual Income model, and EV/EBITDA valuation methodologies, we have a revised estimate of N4.80 (Previously: N4.69) fair value for the stock. At the stock’s N5.35 current market price, the stock trades at a premium to our fair value. Given an estimated total return of -10%, we recommend a HOLD.

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