THE  Q1’18 results of Nigerian Breweries Plc (NB) shows revenues slipped by  9.1% YoY to  N83billion, below analysts’ estimate of  N93 billion (-10.8% deviation). Similarly, after tax earnings sunk by 10.9% YoY to  N10.2 billion, although this was higher than some analysts’  N9.5 billion (+7.6% deviation) expectation.

While acknowledging the effect of seasonality on revenue on a QoQ basis, Nigerian beverage industry observers noted the continued impact of consumer down-trading, despite expectations of recovering consumption. They also attribute the weakness in turnover to the intense competition in the industry,especially the hitherto volume-supportive economy/new mainstream brands, with the growing national presence of INTBREW.

The decline, despite lower base price, is clearly indicative of lower volume outturn during the period. Consistently, for two quarters, NB has now reported YoY decline in revenue, mainly attributed to volumes.

In its Q1-18 trading update, Heineken N.V. (NB’s parent company) said it experienced high single digit decline in beer volume in Nigeria, partly due to some de-stocking at the distributor level.

In the NB’s Q1’18 results there was  improved cost efficiency as overall expenses as a percentage of revenue declined by 4.7ppts QoQ (0.2ppts YoY). Gross margin improved by 138bps YoY and 477bps QoQ respectively to 45.8%, the highest in seven (7) quarters, while operating profit margin also climbed 472bps QoQ and 26bps YoY to 21.3%.

Net finance cost rose by 37% YoY to  N2.4 billion, which NB noted was driven by higher exchange rate losses, even as interest expenses moderated by 4.6% YoY to  N920 million.

On a YoY basis, higher net finance charges weighed on bottom line which shrank by 10.9% to  N10.2 billion. Notwithstanding, this was higher than the  N9.0 billion recorded in Q4’17 impacted by the transmission of higher gross and operating margins. EPS for the quarter amounted to  N1.28, 11.1% lower than the  N1.44 recorded in Q1’17.  The EPS was lower than consensus by 10%.

In their x-ray of the brewing giant’s Q1’18 performance, analysts at Cordros Capital had this to say: “The improved gross margin is consistent with our positive outlook for 2018E (43% vs. 41.7% in 2017FY), even as we consider the traditionally weak Q3 margin.

“Also worthy of note in the latest result, is the 26 bps YoY and 480 bps QoQ increase in EBIT (Earnings Before Interest and Tax) margin, supported by a decline in OPEX (5.0% YoY and 7.0% QoQ) and an increase in other income (6.0% YoY and 16% QoQ).

“We estimate the FX component of finance cost to be N1.1 billion in Q1-18, 87% y/y and 17% q/q higher. Trade payables reduced by c.20% from end-December 2017, the settlement effect (using, in our view, the NAFEX rate, vs. the official rate in Q1-17) of which we believe is reflected in the higher differential in FX losses. “We are encouraged by the lower Q1 revenue to retain our conservative 7.0% growth estimate for 2018E. We maintain our  SELL  recommendation at TP of N107.25 (previously NGN109.75) even as we slightly revise our estimates.