Nigerian Breweries Plc released its FY’20 Financial Statements where although topline performance was an impressive surprise, the strength could not filter through to profits due to an already weakened bottom-line. However, should the company maintain this pace, we expect a relatively quick recovery in profits.
Frothing Revenue despite earlysetbacks
Given the disruptions to activity in October and the ensuing vandalism to several wholesale and retail outlets (domestic trade contracted by 3% in Q4’20), we remained cautious on our revenue projections for the final quarter and expected a modest ₦96.1 billion in turnover (a 10% y/y growth expectation).
Thus, the company’s performance of ₦103.0 billion (+17% y/y) represents a 7% beat to our expectation. Whilst we believe that the revenue beat was as a result of the usual high demand from the festive season, we highlight some other potential undercurrents.
Firstly, we believe that Guinness Nigeria’s de-prioritization of its Lager business (Guinness has the third-largest market share in the lager space) added to NB’s push of its Goldberg and Tigerbrands and may have expanded market share for the company.
Furthermore, we believe that the volume increase from the company’s recent commission of its ₦5 billion ultra-modern PET factory (Polyethylene terephthalate is a strong and lightweight plastic used in packaging foods and beverages), which has the capacity to produce 24,000 plastic bottles per hour boosted its malt numbers as malt is a typical favourite during the festive period.
Another tailwind, albeit probably mildly, may have been its recent launch of another premium segment drink, Desperados, a tequila-flavoured drink that could appeal to millennials who are more spirit-inclined but could also favour a beer.
That said, after a devastating year to the brewery sector (as observed among other major players as well) and despite the weak performance in Q2’20 which bore the brunt of the lockdown, FY’20 topline grew 4% y/y to ₦337.0 billion (Vetiva estimate: ₦330.1 billion).
The toll on profits
Dragged by inflationary pressures and the factors above, the spend on raw materials and consumables jumped 17% y/y to ₦143.4 billion, while the total cost of sales climbed 14% y/y to ₦218.3 billion in the year. As a result, gross margin depreciated 5ppts y/y to 35%.
However, we recall NB’s investment in a distribution company – 234 Stores, in the past year. We believe that this investment is responsible for the ₦7 billion cost savings in distribution expense.
Also, combined with a milder 0.7ppt shave in administrative expenses, Opex declined 7% to ₦90.0 billion. This minimized the harsh impact of the inflated cost of sales on EBIT, although the line item declined 16% y/y to ₦29.6 billion.
Furthermore, its increased CP and bond issuances during the year drove Finance costs 51% higher y/y to ₦18.3 billion, way above our ₦15.7 billion estimates. This effectively wiped the gains on EBIT from optimizing distribution costs and led to a PBT of ₦11.6 billion (a 50% y/y decline).
Thus after-tax, earnings for the full year underperformed our expectation by 28% to print at ₦7.4 billion (54% less than FY’19).
A brewing future
NB has made several strides in the past quarter and year that we expect to monitor over this year. We believe that the continued push of its Tiger, Goldberg and now Desperados brands – which are premium brands – will support Revenues and Margins.
Furthermore, the adaptation of most of its SKUs to plastic and can packaging and the possible market share gain from Guinness Nigeria could sustain this momentum. Thus, we expect an 8% y/y growth in turnover for 2021 to ₦ 364.0 billion, driven mainly by a return to normal volumes.
Whilst we expect the liquidity in the FX market to improve, we believe that margins in the next year will remain low given the current exchange rate as well as the already weakened levels this year. We expect a decline in commercial paper issuances this year especially as yields start to rise in the broader fixed income market.
That said, we expect finance expense to largely remain at pre-2020 levels (FY’21E: ₦11.7 billion) and project a PBT of ₦21.4 billion (+85% y/y). Finally, we project a PAT of ₦14.6 billion (+98% y/y) in FY’21. We project a TP of ₦55.03 and place a HOLD rating on the stock.