Nigerian Breweries Plc FY’18 results – EPS contracts by 41.2% to N2.43

LAGOS (Capital Markets in Africa) – Nigerian Breweries Plc (NB) FY’18 results, top line growth came in at N324.4 billion (-5.9% YoY) for the year, in line with our estimate of N320.6 billion (+1.2% deviation). In the same vein, after-tax earnings declined by 41.1% YoY to print at N19.4 billion, although under-performing our estimate of N22.2 billion. The deviation from our profit-after-tax estimate was as a result of negative surprises stemming from higher direct costs, finance costs and a higher effective tax rate.

Following the unimpressive FY’18 financial scorecard, NB cut its final dividend by 41.5% YoY to N1.83/share. This translates to a dividend yield of 2.2% based on its last close price of N83.0.

Other highlights:

• As expected, festivities in the fourth quarter of the year, gave NB a sales boost in Q4’18. On a quarter-on-quarter basis, revenue advanced by 31.9%, to N3 billion. Although, on a year-on-year basis revenue declined by 4.0%. According to the parent company, Heineken, beer volumes improved in Q4’18, as it was in line with the previous year. As such, we attribute the decline to lower prices in the period. Overall, beer volumes declined mid-single digit for the full year, given the competitive landscape, as well as weak consumer wallets.
• Notwithstanding the decline in top line growth, cost-of-goods sold advanced by 2.0% YoY, to settle cost-to-sales at 62.7% (vs. 59.0% in Q4’17) due to limited pricing pass-through.
• Operating margin settled lower at 10.6% (vs. Q4’17: 16.6%), as SGA expenses to revenue (Q4’18: 26.9%, Q4’17: 24.7%) also climbed during the period.
• Although net finance costs trended lower (-14.2% YoY) to N2 billion, it was not sufficient to offset the impact of the contraction in top line growth and higher costs. Consequently, profit-before-tax declined by 43.3% YoY to N6.9 billion. Also, a higher effective tax rate of 33.0% (vs. 26.2% in Q4’17) weighed on after-tax earnings, as it settled at N4.6 billion (-48.5% YoY) for the quarter.

Analyst take: Weak consumer discretionary spend, a challenging competitive landscape and regulatory changes (higher excise duty tariffs) weighed on NB’s ability to record an impressive result in FY’18. For context, the launch of INTBREW’s Sagamu plant has increased the supply of value lager beer, which has continued to weigh on NB’s market share, specifically in the mainstream segment. Going into 2019, we expect the competitive environment to remain largely same, amidst weak consumer wallets. NB currently trades at a P/E of 34.2x, a premium to MEA peer average (29.4x). Based on our last review, our target price for the counter is N78.60 (SELL)