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Why Nigerian Breweries reported decent Q4-19 upon operating challenges

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Leading capital market analyst group, Cordros Securities has given insights on why the Nigerian Breweries reported a decent Q4-19 result despite the challenging operating environment.

The new report showed that the company’s revenue growth hit a nine-quarter high, and gross margin and EBITDA remaining resilient.

The above was driven by slight price increases taken across key brands ahead of the festive season as well as the continued strong growth trend in malt, Heineken brand and the overall premium portfolio where the company continues to execute. We increase our price target to NGN65.86 (vs. NGN63.60 previously) and retain our ‘BUY’ rating.

Sustained Recovery in Operating Performance:  NB reported Q4-19 with revenue growing by +1.2% y/y; 3.9% below our estimate. Although lower than our expectations, revenue growth was better compared to its major competitor (INTBREW: -5.8% y/y), and was driven by price and mix gains. Top-line benefitted from slight price increases taken across its premium portfolio in the period.

Heineken NV (NB’s parent company) in its 2019FY earnings call, stated that the Heineken brand and the premium portfolio recorded double-digit volume growth. We note that gains at the gross revenue level were slightly eroded by the higher excise duty expense compared to last year. EBITDA for the quarter improved +8.1% y/y with gross margin gains offsetting the higher operating expenditure (+8.9% y/y).

Changes to estimates: We now model 2020E net revenue/gross margin increase of 3.5%/100bps driven by further price-mix gains as we expect growth in high margin malt and premium lager to be sustained.  Revenue will also receive a boost from higher prices – NB increased prices at the start of February to compensate for the recent VAT adjustment. Despite OPEX remaining elevated on continued route-to-market spending, EBITDA and margin are expected to grow by 8.1% and 70bps.

Amidst the lower yield environment, NB recently issued NGN52.5 billion in commercial papers at a yield of 7.1%. Thus, we forecast a 27.8% decline in net finance costs, and reduce our cost of debt in WACC assumption.

Overall, we forecast 2020E EPS of NGN2.85, implying growth of +41.6%. The net impact of our changes is an increase in our price target to NGN65.86/share (from NGN63.60) – implying a 34.8% potential upside.

Projection estimates by Cordros Securities show that NB trades on 2020E P/E and EV/EBITDA of 16.1x and 5.6x, a discount to EM brewers 16.9x and 7.2x respectively.

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