PT unchanged; upgrading to Neutral

Modest cuts to our 2018-19E forecasts: 

Nigerian Breweries’ (NB) Q1 2018 results came in slightly behind our estimates - sales and PBT missed by 8% while PAT was behind by 12%. Consequently, we have reduced our earnings estimate over the 2018-19E period by -6% on average. Despite the cut, we have left our price target unchanged at N109.7 because of positives arising from our decision to reduce our risk free rate assumption by 100bps to 13% due to declining yields on government securities. From current levels, NB shares are trading on a 2018E P/E of 28.4x for EPS growth of 24.9% y/y in 2019E. This year, NB shares have shed -13.9% and have underperformed the broad index which has gained +3.9%. With the shares now trading only -5.5% above our N109.7 price target, we are upgrading our rating on the stock to Neutral from Underperform.

Q1 PBT and PAT down -13% y/y and -11% y/y respectively: 

NB’s Q1 2018 results showed that sales of N83.0bn declined by -9% y/y. PBT and PAT declined by -13% y/y and -11% y/y to N15.2bn and N10.2bn respectively. Although operating expenses declined by -5% y/y and gross margins expanded by 126bps y/y, these were offset by the sales decline, and a 37% y/y rise in net finance charges, leading to the weaker PBT. On a sequential basis, sales declined by -8% q/q. However, PBT and PAT advanced by 25% q/q and 13% q/q respectively, owing to a combination of factors:  1) a 481bp q/q gross margin expansion, 2) a 7% q/q decline in operating expenses and 3) an -8% q/q decline in net interest expense. 

Outlook: 

Although our outlook for the brewers is modestly positive, we still believe that the operating environment remains challenging due to an increasingly competitive landscape. Late last year, NB increased prices; we believe this resulted in the y/y decline in volumes and sales given the competitive nature of the market. For 2018E, we see sales declining by -3% y/y. Gross margin expanded during the Q1 2018 quarter and surprised positively. We attribute the expansion to the ease in the macroeconomic pressures (such as fx liquidity) which we expect will continue to support earnings in the near term. A downside risk to the brewers worth flagging is the upward review of excise duties proposed by the federal government. We have forecasted PBT growth of 2.2% y/y for FY 2018E.