NB Plc: Analysts Cut Earnings Projection after Strong Q1 Result
Nigerian Breweries (NB Plc.) earnings projection for 2021 has been cut to N11.71 billion from N17.91 billion by equity analysts at WSTC Securities Limited after about 40% increase in profit in the first quarter of 2021.
Meanwhile, volume growth expectation remains positive but analysts identified some downside risks including the company’s racing cost profile and reinstated lockdown by the government.
“…the impact of rising costs which are unable to be passed on consumers, due to intense competition, is the major downside factor to bottomline growth. Also, we opine that the recent reinstated nationwide curfew, poses a potential risk to the earning capacity of the company. We revised our2021 earnings projection downwards to N11.71 billion”, WSTC Securities said.
As a result, analysts’ moods slide to neutral, rated the stock hold on account of weaker than acceptable upside potential amidst the ongoing stock market rout. In its financial statements, the Brewer revenue grew by 27% year on year to N105.68 billion in Q1 2021 from N83.23 billion in Q1 2020.
In an equity report, WSTC Securities Limited attributed the revenue growth to price and volume increases during the period. On price increase, analysts said they believe that it was induced by higher raw material costs amid scarce foreign exchange.
Driving the volume growth, analysts express view that new products introduced to the market, particularly the ‘Desperado Tequila’ beer that was launched in December 2020, supported revenue growth.
However, Nigerian Breweries still battles with high costs profile amidst strong inflation rate and local currency, naira, weakness. Specifically, Nigerian Breweries’ cost of sales rose by 37% year on year to N66.01 billion in Q1 2021 from N48.34 billion in Q1 2020.
Consequently, the company’s gross profit margin contracted by 400 basis points to 38% in Q1 2021 from 42% recorded in Q1 2020. With cost racing strongly against revenue, Nigerian Breweries gross profit printed at N39.67 billion in Q1 2020, representing a 14% jump from N34.89 billion in Q1 2020.
While direct costs spiked, overheads behave similarly as operating expenses continue to rise – driven by inflationary pressure in Nigeria and Naira devaluation. Despite an increase in operating expense by 5% to N25.55 billion in Q1 2021 from N24.14 billion in Q1 2020, operating profit grew by 33% to N14.49 billion from N10.94 billion in the comparable period.
Earnings actually jumped in the first quarter due to low base effect. In the first quarter of 2020, the company’s profit was weak due to covid-19 effects on operation.
In Q1-2021, Nigerian Breweries profit before tax rose markedly by 39% to N11.52 billion from N8.29 billion in the comparable period in 2020. Similarly, profit after tax rose by 39% to N7.66 billion in Q1-2021 from N5.53 billion in Q1 2020.
Macroeconomic Challenges Hamper Margins
In Q1 2021, the revenue growth of 27% was partially eroded by the 37% increase in cost of sales. Specifically, raw materials cost spiked 54% to N46.53 billion in Q1 2021 from N30.21 billion in Q1 2020. Consequently, cost margin worsened by 400 basis points year on year to 62% in Q1 2021 compared to an average of 58% recorded in previous quarters.
“We believe that the devaluation of the Naira underpinned the rise in the cost of sales. We also posit that an increased volume sale impacted the increase in the cost of sales”, WSTC Securities said.
Owing to the intense competition in the industry and consumers’ diminished income, analysts said they believe that the company was unable to entirely pass the cost onto the customers. Thus, analysts at WSTC Securities said the company’s inability to transfer the cost resulted in the contraction of gross margin to 38% in Q1 2021.
Bottomline Widens on the Back of Cost Efficiency
Although operating expense grew by 6% year on year, the operating cost margin improved to 24% in Q1 2021 from 29% in the comparable period in 2020.
On the strength of the lower expenses incurred in Q1 2021, the Group’s operating profit grew to N14.49 billion in Q1 2021 from N10.94 billion a year ago. The Brewer’s operating margin improved by 100 basis points from 13% a year ago to 14% in Q1 2021.
Furthermore, net finance cost declined by 13% to N2.98 billion in the period from N2.64 billion in Q1 2020. Analysts said the decline in net finance cost supported the upside realised from operating profit which, therefore, translated to a 39% increase in profit before tax to N11.51 billion within the period.
Similarly, profit after tax grew by 39% year on year to N7.66 billion in Q1 2021.
“We expect to see sustained volume growth, and we also believe that the Company’s strategy of pushing more of its premium brands in the market will continue in the subsequent quarters of the year”, analysts stated.
However, the investment firm said the impact of rising costs which are unable to be passed on consumers, due to intense competition, is the major downside factor to bottomline growth.
Also, analysts opine that the recent reinstated nationwide curfew poses a potential risk to the earning capacity of the company.
WSTC Securities’ fair value estimate for Nigerian Breweries now is N50.07, effectively translating to a -6% total return (price return: -9%; dividend yield: 3%), based on stock market price of N54.80.
NB Plc: Analysts Cut Earnings Projection after Strong Q1 Result
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