Following earlier price hikes recorded in 2016,
NB reported yet another price increase in Q1’17 as the brewer continues to protect margins amidst cost pressures. Although volumes have been impacted due to pressured consumer wallets, higher prices continue to offset the weaker volumes as Q1’17 revenue rose 18% y/y to ?91.3 billion - 8% ahead of estimates of analysts at Vetiva Capital Management Ltd in Victoria Island, Lagos.
Whilst gross margin remains weak y/y (down 364bps) reflecting the effect of the weaker naira and inflationary pressure on input costs, we highlight the 255bps q/q margin expansion recorded in Q1’17 to 44%. We attribute the margin improvement to the price increase implemented. With this, Q1’17 gross profit rose 6% q/q and 9% y/y to ?41 billion, beating our ?36 billion estimate.
Earnings in the quarter were further bolstered by lower interest expenses and continued benefits from the brewer’s “Every naira counts” cost savings program which saw OPEX (as a % of sales) moderate 143bps y/y to 24%, above Vetiva’s 27% estimate. Consequently, Q1’17 PAT rose 11% y/y and 45% q/q to ?11.4 billion, outstripping Consensus estimate by 37%.
Bearish outlook for volumes, price to remain to sole support
Asides the effect of higher pricing, we note that increased competition across all categories has been partly responsible for the volume pressure. According to management, market share declined in both Q2’16 and Q4’16.
Whilst we note that
NB remains the market leader across most segments, intensified competition from existing players and new entrants (particularly in the value segment) continues to threaten its position. Specifically, NB’s Goldberg has been left to battle AB InBev’s Trophy in the West, whilst Life beer contends with AB InBev’s Hero in the East.
We believe
NB would have to remain nimble, both in innovation and pricing, to protect its market share in the next few years even as the world leading brewer, AB InBev (through International Breweries) spreads its tentacles across Nigeria.
That said, we expect revenue growth to remain majorly supported by higher pricing and we revise our y/y revenue growth estimate higher to 10% (Previous: 8%). Whilst we remain cautious on the exchange rate environment and maintain our assumption of more FX losses this year, we are more optimistic about the cost containment strategy and revise our OPEX to Sales ratio slightly lower to 26% (Previous: 27%).
Consequently, our FY’17 EPS estimate is revised higher to ?4.48 (Previous: ?3.98). Analysts at Vetiva Capital Management Ltd in Victoria Island have reviewed their 12-month Target Price for
NB slightly higher to ?113.99 (Previous: ?111.57).