International Breweries reported net losses in FY 18 and Q1 19. The consolidated group (incorporating Intbrew, Pabod and Intafact) made a net loss of NGN4.0bn in Q1 19, which was 78% higher than in Q1 18. This followed a net loss of NGN3.9bn in FY 18 (also for the consolidated entity), which fell below our forecast of NGN2.8bn loss. The results were weighed by significant cost pressure, which offset higher revenues, particularly in Q1 19 when there was a 35% yoy jump. In FY 17, the company recorded net income of NGN2.9bn, but this was a standalone result for Intbrew (January-December 2017), as management did not provide historical standalone financials for Pabod and Intafact, or for the consolidated entity.
Reiterate Sell with a TP of NGN20.44 (20% ETR). Despite a 27% decline in stock price in the past three months, we maintain our Sell rating on Intbrew, pending a review of our valuation following the weaker-than-expected results. Our bearish stance is due to expected pressures from operating expenses and finance costs on earnings in the near term. Upside risks to our current rating include faster-than-expected volume growth driven by competitive strength of Intbrew’s value brand segment and backed by capacity expansion. Intbrew currently trades at FY 19f EV/EBITDA of 12.5x, relative to peer average of 11.8x.
Weak operating performance as cost pressures intensify. The group recorded an operating loss of NGN0.2bn in Q1 19 (versus operating income of NGN1.2bn in Q1 18) and operating income of NGN7.9bn in FY 18, which reflected a 5.3ppts yoy decline in EBIT margin. The weakness was mainly due to greater cost burden from increased marketing and distribution costs following: 1) the launch of the Sagamu Brewery in 2018, and 2) an aggressive national marketing push for key brands such as Budweiser, as well as Hero and Trophy, which have primarily been regional brands. There were also increases in admin expenses, which likely incorporated a one-off restructuring cost. As a result, opex/sales rose to 35% and 31% in Q1 19 and FY 18, respectively from 22% in FY 17.
Significant finance burden weigh on bottom line. After obtaining additional debt for capacity expansion in 2018 and consolidation of borrowings from the Pabod-Intafact merger, total borrowings for the consolidated entity jumped to NGN225bn in Q1 19 from NGN72bn at end-FY 17. This led to a 41% yoy increase in net finance costs in Q1 19, and a significant deterioration in the interest cover to 0.3x in FY 18 from 1.6x in FY 17 (interest cover was negative in Q1 19).
Revenue in Q1 19 suggests a slowdown in market share gains. Although revenues were up 35% yoy, the qoq trend was much weaker with a 6% decline. Considering that Nigerian Breweries (NB) recorded a 23% qoq revenue growth in Q1 19, it appears that Intbrew’s market share gains eased, as prices were broadly flat across the sector. That being said, we believe the additional volume headroom contributed to keeping gross margins stable at 35.6% in Q1 19 (up 0.3ppts yoy vs a 3.7ppts decline for NB and a 0.8ppts decline for Guinness), having normalised from an unsustainable high of 49.9% in Q4 18.