Elevated Opex Wipes Out Q2 Earnings

Nigeria Breweries
Nigeria Breweries Incur N70.6 Billion In Forex Losses

Nigerian Breweries’ Q2’21 performance showed a stronger 51% y/y growth (Q1’21: +27% y/y), bringing the H1’21 performance (+38% y/y) to ₦209.3 billion, 1% lower than our Revenue expectation of ₦210.3 billion.

Whilst we believe that the lower base from the pandemic-induced slump in the previous year was quite instrumental in the significant growth reported this year, we recall a number of initiatives that the company had implemented in the past year.

Nigerian Breweries implemented a can repackaging strategy across several of its SKUs (Store Keeping Units), whilst introducing a tequila-flavored beer product Desperados into the market and increasing its malt-bottling capacity.

In addition to these initiatives, we believe that the company’s market share has increased in the past year, given a key competitor’s decision to deprioritize their Lager focus and was thus significant in volume growth for the brewer.

That said, driven by the existing tailwind factors and in line with the H1’21 run rate, we expect NB’s FY’21 Revenue to print at ₦397.7 billion (+18% y/y).

Despite its premiumization drive and the pricing upticks in the first quarter of the year, the elevated cost of sales (+43% y/y to ₦132.6 billion) – driven by increased FX and inflationary pressures on raw materials (raw material costs increased by 56% y/y to ₦92.9 billion for the H1 period) – has negated possible margin gains as gross margin has shrunk by 2ppts y/y to 37%. Given cost challenges as well as competition in the space and the consequently limited scope for price increases, we do not expect NB’s margins to improve in the next half year.

Meanwhile, Opex presented a negative surprise as marketing and admin expenses were marked by steep (62% y/y and 41% y/y respectively) increases in the Q2 period, mostly spurred by advertising and sale expenses as well as employee benefits and repair and maintenance expenses. However,  EBIT for the H1’21 period rose 32% y/y to ₦20.0 billion, driven by the stellar performance in the Q1’21 period, as depreciation expenses remained largely flat.

Furthermore, whilst finance income dropped 45% y/y, finance costs increased 21% y/y with net finance costs coming in at ₦8.0 billion for the half-year. Overall, NB’s PAT shrank 22% y/y to ₦0.07 billion, despite the low base from last year.

In line with this track record, we revise our estimates and project that the company’s EBIT for the FY’21 period will print at ₦38.6 billion (+30% y/y), culminating in a PBT figure of ₦27.6 billion (+1.3x y/y) and a PAT figure of ₦18.8 billion (+1.5x y/y). Thus, we project a target price of ₦61.01 per share and rate NB a HOLD.