FRI, FEBRUARY 23 2018-theG&BJournal-The Investment Banking firm, Renaissance Capital say they have raised their TP for Nigerian Breweries (NB) by 1.0% to NGN110.3/share and maintained SELL rating. Their expectation is underlined by the 2.0mn hl greenfield beer capacity facility along the Ijebu-Sagamu express road coming on in 2018 and a still-weak consumer.
”Our outlook for beer price increases is sub-inflationary. With consumers still trading down, albeit into a decelerating segment, a further change in mix makes gross margin expansion a challenge in the near term,” according to Adedayo Ayeni of Renaissance Capital.
He said they expect NB’s volume growth, although positive, to be low at 1% in 2018 but sees improving macro factors.
”We are mindful of risks from the decelerating mainstream segment (formerly value) and further risks to volumes from proposed excise increases. On net, we still believe the risk-reward profile for the stock is negative on our expectation of shrinking operating margins and sub-inflationary net profit growth in FY18.”
Following NB’s FY17 results, net sales growth is projected to slow in FY18 as the effect of the 15.6% implied price increase sits in the FY17 base. Volume growth is also expected to come in below 1% YoY as pricing growth outlook is cut given the still-tough consumer environment.
”We believe NB’s negative volume growth in FY17 will move management to defend market share and given that ABI’s upcoming capacity is a major threat to NB and Guinness Nigeria, we do not expect material price increases in FY18. We have therefore modelled sub-inflationary beer price increases of 6.2% and 6.0% in FY18 and FY19, respectively,” says Ayeni.
Gross margins is also projected to decline by 180 bpts to 39.9% in FY18. NB management repeatedly identified the competitive risk from ABI during the FY17 results call and while it appeared confident in its ability to protect market share (which we now estimate declined to 58% in 2017) its portfolio of mainstream and premium brands will still be dilutive to volume growth.
Based on this, volume growth is forecast at 0.3% and 2.3% in FY18 and FY19, respectively, while sales forecast is cut by an average of 3.7% in FY18-20 and operating margins slipping by 134 bpts to 15.2% in FY18.
Cost pressure from a depreciated currency and domestic inflation has driven down NB’s EBITDA margin from 30.8% in FY15 to 26.5% in FY17. However, with new management it is believed there will be a focus on cost cutting at the operating level which could protect it from the shrinkage in gross margins.
Notwithstanding, inflationary pressures will still be difficult to pass on as higher prices given the loss of market share and slowdown in the value segment as indicated by Guinness Nigeria’s management.
Given that, it is not expected that NB will benefit from any strong price increases as it did in FY17, while EBITDA margin is forecast to dip 170 bpts to 24.8% in FY18 before stabilising at 25.0% in FY19.
”The loss of cash margin could be stemmed by aggressive operating cost cutting which is a risk to our estimates. Management has not provided any guidance in this aspect,” says Ayeni.
Further growth of 33 Export, Goldberg and Life lager (which are priced above Trophy and Hero) could dilute NB’s gross margins although management said Heineken was back to growth in 2017 after underperformance in 2016.
According to Ayeni, in responding to our question on brands, management stated that downtrading is still ongoing which could support the lower near-term gross margin outlook. While still weaker than FY17, we forecast FY18 EBITDA margins to be stronger than we anticipated previously.
”We therefore raise our FY18-20 EPS forecast by an average of 1.7%.”
