Nigerian Breweries Q2 2017 Results Review – Maintaining Underperform Rating



Retaining UP rating despite 28% increase to our price target


Nigerian Breweries’ (NB) Q2 2017 results showed marked y/y growth across key headline items. The results were mainly boosted by higher pricing relative to the prior year. On its Q2 2017 conference call, the management of Heineken (NB’s parent) disclosed that unit volumes for its Nigerian business operations declined y/y.

Although the quantum of decline was not specified, we estimate that unit volumes declined by mid-single-digits y/y due to inflationary cost pressures on consumer discretionary spending. Relative to our forecasts, the results were broadly in line. As such, we have barely changed our 2017E EPS forecast.


However, given the positive outlook on margins, underpinned by the company’s substitution of domestic inputs for imports, we have increased our 2017E-18E EPS by around 8% on average. This, together with our decision to roll-over our DCF valuation to 2018 are the major factors driving the 28% increase to our price target to N128.4. On a relative basis, the shares are trading on a 2017E P/E multiple of 37.2x (for 35% y/y EPS growth in 2018E).


This compares with the 73.9x (end-June) P/E multiple for a -67% decline in EPS that rival Guinness Nigeria is trading on. Having gained 25% ytd (vs.34% NSE ASI) NB shares imply a potential downside of -31% from current levels. Consequently, we retain our Underperform rating on the stock.


PBT up 16% y/y underpinned by solid sales growth


NB’s Q2 sales grew by 12% y/y to N89.7bn while PBT and PAT of N16.6bn and N12.3bn advanced by 58% y/y and 43% y/y respectively. The solid bottom line was driven by the strong y/y sales growth, a 4,650bp y/y gross margin expansion to 45.4% and a -35% y/y decline in net finance costs.


These factors more than offset a 7% y/y increase in operating expenses. Further down the P&L, an increase in the effective tax rate to 26% compared with 18% in Q2 2016 resulted in PAT growth narrowing to 43% y/y. On a sequential basis, sales were flat q/q while PBT was down -5% q/q. The q/q decline in PBT was due to a 98% q/q and a 3% q/q rise in net finance costs and operating expenses respectively.


These factors offset a 100bp q/q gross margin expansion. However, a lower tax rate q/q led to PAT growing by 7% q/q. Compared with our estimates, Q2 sales and PBT were broadly in line. However, PAT was ahead by 8% due to a lower tax rate compared with our 30% estimate. In terms of the H1 performance, sales PBT and PAT all grew by 15% y/y, 33% y/y and 25% y/y respectively.