08 March 2019 :Following its FY18 result, management of Nigerian Breweries Plc (NB) hosted an analyst call where it provided insight into the strategic outlook of the firm over 2019. Despite paucity of insights into the numbers, the key take-away was management’s guidance to raise product prices this year.

After a tough financial year that sunk share price and earnings to multi-year lows in 2018, NB is faced with yet another challenging year. First off, with intense competition from International Breweries (IB) and graduated excise duty (+17% YoY) that kicked-off in Jan-19, revenue growth is expected to be slow even as analysts expect higher finance cost (+38% YoY) to be another pressure point to earnings this year. However, given analyst's case for a slight improvement in volumes and decline in cost of sales (-1.1% YoY) which translates to gross (+120bps YoY) and EBIT (+101bps YoY) margin expansion, the misery seems moderated. Overall, the net impact of all analyst's adjustments translates to PBT of N29.9 billion and EPS of N2.58 (+6.3% YoY) over 2019. Consequently, analysts cut their FVE on NB to N75.82 (previous: N76.58), translating to a SELL rating on the stock based on current pricing. On analyst's numbers, NB trades at a 2019 P/E of 27.1x (5-year historical average of 33.6x) relative to Guinness of 18.96x.

Price hikes: a flattery or adulation? At its FY 18 analyst call, management guided to raising prices to provide buffer against the graduated excise duty (+17% to N0.35/cl) which commenced in January 2019. While the higher excise duty provides premise for a price hike, analysts think the decision to raise prices on its mainstream products cannot be done in isolation. Particularly , given the turn of events last year where NB reversed price hike on its mainstream – Goldberg and Life following IB’s decision to leave prices unchanged, analysts think NB’s decision to pass-on excise duty hikes to consumers lies with IB’s resolve to tow similar path. However, analysts see possible reluctance by IB’s to take in price increases over the near term following its strategy to gain market share in order to increase its fixed cost absorption rate at its new brewing plan in Sagamu. Thus, while analysts see room for possible price increases across NB’s Premium and Non-Alcoholic products, analysts rule out any price increases by on its mainstream products in 2019.

Mild revenue expansion in sight. On volumes, given that Mainstream and affordable beer which currently accounts for a major share of its volume is in direct competition with IB’s Trophy and Hero – which contributes the most to IB’s volume, analysts still see scope for weaker volumes growth in its mainstream segment this year, albeit moderated compare to last year due to analyst's expected improvement in consumer wallet coming from the proposed minimum wage increase from N18,000 to N27,000. In the premium segment, analysts remain optimistic of volume growth as Heineken continues to put up a good showing. Accordingly, analysts forecast a tamer 0.8% YoY growth in net revenue to N327.1 billion over 2019, lower than average revenue growth of 9% over the past five years.

Scope for margin expansion. Analysts forecast FY 19E cost of sales to decline 1.1% YoY to N193.2 billion following absence of one-off induced right sizing expense that drove Cost of goods sold (COGS) higher in Q4 18. In addition, analyst's expectation for a slight recovery in volumes which paves way for an economies of scale is positive for COGS over 2019. Accordingly, analysts forecast gross margin expansion of 180bps YoY to 41% in 2019.

In a bid to further entrench its market presence and channel its product directly to final consumers, management plans to sustain its Sell-in marketing strategy over 2019 which in analyst's view would necessitate higher marketing expenses (+2.7% YoY). Hence, analysts still maintain their view for higher operating expenses over 2019 (+2.3% YoY to N92.9 billion) with OPEX to sales ratio of 28.4% (FY 18: 28%). However, due to a faster expansion in gross margin analysts forecast a 100bps expansion in EBIT margin to 12.4%, lower than 5-year historical EBIT average of 18.2%.

Analysts forecast higher finance expense over 2019. Following the drawdown of its revolving facility over 2018, analysts have raised borrowings by 6% to N43.5 billion. Coupled with expectation of slight depreciation of the Naira (analysts see a 3-5% depreciation this year) analysts raise their 2019E finance cost by 37% to N10.9 billion over 2019 and net finance cost of N10.6 billion. Over all despite their higher net finance cost on account of upward adjustment to borrowings, their forecast translates to FY 19E EPS of N2.58 (FY 18: N2.43). In line with historical trend of 100% dividend payout, analysts forecast dividend yield of 3%.

Following adjustment to their forecast, analysts cut their FVE on NB to N75.82 (previous: N76.58) which translates to a SELL rating on the stock based on current pricing. On their numbers, NB trades at a 2019 P/E of 27.1x (5-year historical average of 33.6x) relative to Guinness of 18.96x.

Reporting for EasyKobo on Friday , 08 March 2019 in Lagos, Nigeria

Source: Damilola Olupona from ARM Securities Limited

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