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Analysts differ with Nigerian Breweries on why it’s H1 2018 profit dropped by 22%

Contrary to claims by the Nigerian Breweries (NB) Plc that its half year profit came down by 22 per cent due to the new excise duty regime and higher tax on beer introduced by the Federal Government in June 2018, market pundits have traced the result to stiff competition.

In the filing statement signed by the Company Secretary/Legal Adviser, Uaboi Agbebaku, the brewer said: “that the new excise duty regime and higher rate of beer introduced by the Federal Government in June 2018 further impacted on affordability in the period under review.”

The company therefore announced a profit after tax of N18billion in its half-year (H1) operations, representing 22 per cent decrease over the N24billion recorded in the corresponding period in 2017.

A breakdown of the brewer’s result sent to the Nigerian Stock Exchange (NSE), indicated that revenue also dipped by five per cent from N181billion in 2017 to N173billion during the period under review.

NB reported 33.1% y/y decline in Q2-18 EPS, impacted by sales and gross margin declines, as well as higher effective tax rate, which offset a significantly lower net finance cost. Both the achieved revenue and net profit trailed our estimates for the three months period by 6% and 39% respectively. And annualized, the H1-18 EPS of NGN2.31 is 8% behind consensus estimate for 2018E.

According to analysts at Codros Capital, Competition, seasonality, and price hike had impact revenue as the reported Q2-18 revenue was less than Q2-17 by 0.03% as it recorded y/y decline in revenue for three quarters in a row.

At current run-rate (-5% in H1-18), and considering sales is typically slower in H2, industry expert no longer expect NB to grow revenue in the 2018 fiscal year.

On the report, Codros Capital said “Our revised revenue estimate of NGN337.7 billion is lower by 2% (vs. +7% previously) compared to 2017FY. And we also expect a downward revision of consensus’ estimate of NGN362.2 billion (+5% vs. 2017FY) following the latest result. Heineken (NB’s parent) had guided in May to declining sales volume in Nigeria”.

“On one hand, we believe unit volume was affected by Ramadan-related decline in beer consumption. But more broadly, we reiterate that NB’s market share is under pressure from the growing presence of competition – INTBREW (not covered) specifically – in the West and East markets. We should also mention the price hike in early June as possibly impacting volume.

“A concerned margins contraction: Q2-18 gross margin came in at 42.4%, down by about 300 bps y/y and q/q, and at strong variance to the 46.4% rate we expected. Our assumption is that NB may have absorbed the additional costs associated with the newly approved excise duties for alcoholic beverages, effective June.

“For instance, we are aware that NB increased the prices of beer earlier in June (Star Radler, Life, Gulder, and Goldberg), but rolled some back by the end of the month. While we expect NB will eventually pass on the extra costs to consumers, we expect it will be measured and staggered, amidst increasing competition for market share (for instance, we understand INTBREW retained the prices of its product after the new excise duties took effect). Consequently, we revise our gross margin estimate for 2018E 150 bps lower to 41.5%, while retaining estimates over 2019-2020E at 43% average.

Codros Group also averred that “The Q2-18 result shows EBITDA and EBIT were lower by 20% y/y and 31% y/y respectively, with 24% (-606 bps) and 16% (-686 bps) margins. Both opex and the margin were higher than our estimates. Overall, we forecast EBITDA and EBIT to contract by 6% each in 2018E, with 25.2% (vs. 26.5% in 2017FY) and 15.8% (vs. 16.6% in 2017FY) margins respectively.

Further analysis showed that operating activities declined by 20 per cent to N32billion from N39billion year-on-year, just as profit before tax also dropped by 19 per cent from N34billion to N28billion in the same period.

Above all, NB was quick to warn that the operating environment remains challenging even though it expressed confidence in its management capacity to deliver good returns barring any unforeseen circumstances as second half of 2018 continues.

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