November 27, 2017

Nigerian Breweries, Guinness: Weak financials repulse analysts

From L-R: Mr. Johan A. Doyer, MD/CEO NB Plc & •Peter Ndegwa, MD/CEO, Guinness Nigeria Plc

From L-R: Mr. Johan A. Doyer, MD/CEO NB Plc & •Peter Ndegwa, MD/CEO, Guinness Nigeria Plc

… But investors’ sentiments appear stable for Guinness

By Emeka Anaeto, Business Editor

Nigerian Breweries Plc (NB) and Guinness Nigeria Plc, are among the leading multinationals in the Nigerian Stock Exchange, but their stocks and recently their financial performance are no longer in leading positions.

From L-R: Mr. Johan A. Doyer, MD/CEO NB Plc & •Peter Ndegwa, MD/CEO, Guinness Nigeria Plc

From L-R: Mr. Johan A. Doyer, MD/CEO NB Plc & •Peter Ndegwa, MD/CEO, Guinness Nigeria Plc

Though investor sentiment appear stable (with modest upticks) for Guinness in 2017 overall performance, the short-to-medium term outlook, however, looks hazy going by analysts’ permutations.

NB is even worse off as investor sentiment has already started pressuring the stock massively amidst a lack-luster interim results despite interim dividend. And investment analysts have also expressed discomfort with the financials.

Already there has been reversals in performance metrics for both brewing and beverage giants especially in earnings and profitability in the near to medium terms while stock price targets have also been downgraded.

Stock investor sentiments

For NB the investor sentiment has been hugely adverse especially since the announcement of the 2017 third quarter (Q3’17)/ 9-Months (9-M’17) results in the last week of October.

Consequently, the stock price has been pressured down with Year-to-Date (YTD) returns as at last weekend trading at significant deficit of -8.4%, down from a positive of 13.4% it had recorded as at date of the results announcement. In all the stock had lost value to the tune of 19..2% since the result was announced. It lost 13.3% this November already and the losing streak, according to stock analysts, would continue this week to a bottoming out yet to be determined.

For Guinness, investor sentiments appeared stable so far though the financial results was not better significantly. Guinness’ financial year starts July, hence it counts first quarter when NB is counting third quarter.

Return on equity investment in Guinness is still positive at a YtD of 22.8% as at last weekend! a modest inch up from 21.6% just before its Q1’17/ 18 results announcement a day after NB’s in October. However, the stock declined marginally by 1% upon announcement of the result considered to have fallen behind consensus estimates, following elevated costs.

But the stock has recovered by 2.0% as at last weekend with uncertain indication of a fragile stability in the days ahead.

The overall picture of the two beverage giants is that of uncertainty in stock pricing with analysts revising almost all estimates downward at the backdrop of negative surprises in their most recent financial statements.

The weak lines in NB

Drilling into the financial reports of NB for the 9-M’17, analysts at Cardinal Stone Partners Limited, a Lagos based investment house, stated stated: “Turnover rose by 14.4% year-on-year, YoY, to N254.7 billion, in line with our estimate of N256.3 billion (-0.6% deviation). After tax earnings for the nine-month period grew by 19.4% YoY to N24.0 billion, underperforming our estimate of N29.8 billion (-19.6% deviation).”

They also noted that the company’s revenue rose by 12.8% YoY to N73.7 billion, primarily driven by price increases effected earlier in the year.

“On a quarterly basis however, revenue declined by 17.9% QoQ due to seasonality – the rains which occurred in Q3’17 impacted sales volume (declined mid-single digit),” they observed further.

They also stated: “Q3 ’17 cost of sales (+15.3% YoY) rose at much faster pace than revenue, as the company faced cost pressures on its raw materials and other production related expenses. As a result, gross margin moderated by 143 bases points (bps) YoY to 34.4%. Quarterly, gross margin contracted by 1103bps due to the high revenue base of the prior quarter.

“ Further down, the company reported a 15.7% YoY increases in operating expenses, due to a 15.4% YoY and 16.5% YoY increase in distribution and administrative expenses respectively. This weighed on operating profit margin as it contracted by 211bps YoY.

“While net finance cost increased by 47.4% YoY to N2.6 billion, it declined by 25.3% QoQ, as a result of lower finance costs reported during the quarter (-25.1% QoQ).

“Largely driven by the input cost pressures faced in the period under review, the company reported a 75.2% YoY decline in Q3’17 after-tax earnings. Sequentially, earnings declined markedly by 97.9% QoQ”, the analysts concluded.

Nigerian Breweries announced an interim dividend of N1.00 kobo per share, which translates to a dividend yield of 0.6% based on the closing price on the day the result was announced.

Why we are cutting forecasts on NB – Cordros Capital

In its recent analysis of NB’s profile, analysts at Cordros Capital, another Lagos based investment house, stated: “We cut NB’s 2017F EBITDA (Earnings Before Tax, Depreciation and Amortisation) and net profit forecasts by 14% and 23% respectively, on downwardly revised revenue growth and gross margin estimates, following the surprise miss in Q3’17.

“We also cut forecasts for 2018-2019 by 8% and 13% average respectively, specifically on the cut to revenue forecasts. On net, we cut our TP (Target Price) for the stock by 3% to NGN123.16/share and reiterate our SELL rating on the stock. We also roll forward our estimates and valuation by one year.”

Continuing, the analysts stated: “We cut revenue growth estimate to 12% (previously 18%), after realized Q3’17 sales came 9% behind our estimate, notwithstanding that price was increased at the beginning of the quarter.

“Average growth estimate of 5% for 2018-2019 is unchanged, as the effects of price hikes wane. Significant moderation of inflation on stronger naira and election-related spending, are upside risks to our estimates.

“We cut gross margin (GM) estimate for 2017 by 220 bps to 43% and by 100 bps average to 44%, for 2018-2019.

“While we consider the surprise 1,100 bps decline in Q3-17 GM as one-off (as we do not expect amount recognized for technical fees will remain elevated), the slight downward revision to 2018-2019 estimates reflects the upward price outlook of key production material inputs.

“Specifically, the price of Barley, (a major raw material) is forecast to rise +6% over 2018-2019 while the increase in locally sourced Sorghum ( another major raw material) price could be more, on rising domestic and external demand, amidst slowly growing production.

“And while acknowledging the better macro outlook, we expect a fundamental change in the current pattern of consumption in the beer industry (i.e. strong growth of the value beer segment) to lag”.

The circumstances and outlook for Guinness were similar. We present the details next week.