We lower our target price for Nigerian Breweries (NB NL) to NGN75.84 (previously, NGN81.00). With an ETR of 20%, we reiterate our Buy rating.
NB recently released its Q1 results, recording an EPS of NGN1.00, down by 22% yoy. After weak performance in FY 18, earnings showed some signs of improvement, albeit still reflective of industry pressures. We maintain our top-line growth projection for FY 19f, but make a 30% cut to the bottom line.
We revise our bottom-line forecast. We remain positive on NB’s top-line growth in FY 19f due to: 1) a tepid improvement in volumes (up 5% yoy in FY 19f), which began in Q4 18 and continued into Q1 19, consistent with management guidance; and 2) the expected price adjustment on selected products within the portfolio, particularly in the premium category, where consumers are less price-sensitive and competition is weaker. Furthermore, we expect the pace of market share deterioration to moderate through the year. On the other hand, we expect higher excise duties as well as rising operating and input costs to exert pressure on the bottom line. Hence, we maintain our FY 19f top-line growth projection of 5% yoy, but cut our net income growth forecast to 21% (a 30% reduction from our earlier forecast). Nevertheless, we maintain our Buy rating, albeit with a lower TP of NGN75.84. NB is trading at FY 19 PE and EV/EBITDA of 22.3x and 8.1x relative to the GEM peer average of 22.9x and 14.6x, respectively.
Top-line growth suggests volume deterioration has eased. Despite NB’s gross revenue growth of 6% yoy, net revenue only rose marginally (+0.4% yoy) as a result of pressures from higher excise duties. Still, the positive trend in revenue suggests the volume deterioration has stalled, as indicated by management, and we expect this to continue through the year. NB’s EBITDA weakened owing to a jump in input costs (up 7% yoy), which eventually translated to a bottom-line decline of 21% yoy.
Margins weaken as cost pressures persist. Gross profit and EBIT margin each fell by 4.6ppts to 38% and 43%, respectively. With the likely increase in excise duties, we expect margins to weaken further, especially if industry competition constrains NB’s ability to raise prices.