Severe revenue drop tames H1 performance
Nigerian Breweries recently released its Q2’20 results, reporting a 17.5% q/q slump in topline to ₦68.7 billion. Despite a better than expected performance amid a significantly tougher operating environment, (Vetiva estimate: ₦43.5 billion, -47.8% q/q) the weaker Q2 performance took H1’20 Revenue to ₦151.9 billion, a 10.8% step-down from its H1’19 performance.
We believe that in the quarter under review, the implementation of lockdown measures following the onset of the pandemic combined with pressured income levels slowed down beer consumption drastically.
Furthermore, post-lockdown, social distancing has ensured that this trend of reduced beer volumes remained.
Taking into consideration that the phased increases in excise duty have ended, with the last increment in July 2019, the company should see some respite with respect to the impact on Net Revenue this year.
However, despite the topline beat, we still maintain that the company’s revenue strength remains compromised and expect that the line item would come in at ₦292.7 billion, a 9.4% y/y decline, owing to depressed income levels and the impact of social distancing measures on alcohol consumption.
Cost containment measures suppress opex growth
Succumbing to inflationary pressure as well as elevated costs of importation from increased forex volatility, gross margin declined 3.2ppts y/y to 38.9% in H1’20. Operating profit also declined by 38.5% y/y to ₦14.7 billion in the same period.
In 2019, NB introduced a new distribution strategy that was expected to lift margins by containing middle-men costs. Although marketing and distribution cost has been significantly contained to ₦34.3 billion (-10.0% y/y) for the half-year, this gain did not translate to improved operating margins due to the substantial pressure on the top line.
Further down the line, finance costs grew 29.5% to ₦6.8 billion following several commercial paper issuances as the company refinanced loans partly to take advantage of current favourable rates and partly to pay down its foreign currency loans.
We expect this repositioning to prove favourable to the company as we anticipate further FX adjustments in the near term. All in, the bottom line for the company took a very drastic dive in Q2’20 (-98.5% q/q) to ₦0.08 billion dragging PAT for the half-year down 58.0% to ₦5.6 billion.
Earnings estimate revised on improved revenue expectation
We adjust our full-year estimates for the cost of sales to reflect the H1 run rate, forecasting a 17.0% drop in gross profit to ₦108.9 billion while adjusting operating expenses to account for increased energy costs.
On the other hand, the company’s debt holding has seen a 1.5x increase since the beginning of the year, majorly through short-term debt. Thus, we expect to see more commercial paper refinancing as the short-term debt obligations become due, as well as a 9.4% y/y jump in finance costs to ₦13.2 billion.
We project a PAT of ₦12.8 billion for FY’20 (-20.8% y/y). We value NB at ₦43.45 and revise our recommendation to a BUY.