NB Plc: Valuation Spots Weak Upside as Cost Pressure Dents Earnings
Equity analysts at PAC Capital keep Nigerian Breweries (Ticker: NB) stock in its neutral bucket due to low upside potential as increased costs dent earnings recovery in the first half of the financial year 2021.
Pressure on the company’s net profit margin was driven by high costs burden which plunged gross margin to 37.24% in the first half of 2021, from 38.96% last year amidst pandemic-induced economic stress.
Down the line, the company’s net profit margin settle for a 10 basis points increase to 3.69% compared with 3.68% reported last year despite sales recovery –partly driven by increase products prices.
Investors currently value Nigerian Breweries at N415 billion on 7.996 billion outstanding shares at a price of N52. The company’s share has shed more than 7% since the beginning of the year with 52 weeks price range from N36 to N63.25.
Invariably, Nigerian Breweries did well in terms of value adding during the pandemic than the current situation when considering the relationship between revenue and associated costs of sales.
The investment firm’s valuation puts the Nigerian Breweries share target price at ₦54.39, representing an increase of 4.59% from the current price of ₦52.00, a deviation less than 10% return mark for the company’s buy rating.
Consequently, analysts said they maintained a hold recommendation on the stock with an outlook for possible re-rating amidst a seesaw movement in the Nigerian stock market.
In the first half, the investment firm noted that Nigerian Breweries continued with a strong recovery as revenue increased significantly by 37.84% to ₦209.26 billion driven by improved demand and higher prices during the period.
In the comparable period in 2020, the brewer sales printed at ₦151.81 billion.
However, the company’s cost of sales increased significantly by 41.73% to ₦131.34 billion in H1-2021 from ₦92.67 billion in a year ago, due to higher production volumes and high inflation rate during the period.
In addition, the marketing, distribution and administrative expenses expanded by 31.96% to ₦58.63 billion, significantly higher when compared with ₦44.43 billion in the first half of 2020, as a result of higher advertising and sales expenses, higher repairs and maintenance costs, among others.
Analysts said despite the significant increase in the operating expenses, the earnings before interest tax, depreciation and amortisation (EBITDA) of the company increased by 19.42% to ₦39.67 billion in H1-2021 from ₦33.22 billion a year ago.
Also, the net finance cost increased by 19.05% to ₦7.98 billion from ₦6.70 billion in H1-2020, as the company continued to service the additional borrowing (via commercial papers) during the period.
PAC analysts stated that the impressive operating performance during the period outweighed the setback recorded in non-operating activities as profit before tax rose by 43.07% to ₦11.94 billion in H1-2021 from ₦8.35 billion in the comparable period last year.
Notwithstanding the higher tax provision of ₦4.22 billion for tax which was about twice of ₦2.76 billion recorded in the first half of 2020, profit after tax improved by 38.09% to ₦7.72 billion in H1-2021.
In the comparable period last year, Nigerian Breweries had delivered ₦5.59 billion.
“We expect the revenue of the company to continue to increase in the second half of 2021 due to the expectation of improved economic activities and acceptance of new brands -Desperados, Star Radler – Red Fruits and Amstel Malta Ultra- in the market”, PAC analysts said.
However, high operating expenses may be a major threat to the profitability of the company in the second half of 2021, PAC Capital analysts said in the equity report.
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Based on the recent figures and projection, analysts at the firm maintain a hold recommendation, advising investors to neither buy nor sell the stock, as present forward estimates place the company share price at ₦54.39 from ₦60.28 previously projected.
Nevertheless, analysts recognised that the brewer maintains a strong balance sheet in the first half of the financial year 2021, despite a decline in total assets, mull expectation of a slight increase in dividend payment.
The total asset of the company fell by 4.02% to ₦445.47 billion in the first half operation from ₦464.12 billion in the comparable period last year, mainly driven by a significant fall in trade & other receivables and cash & cash equivalents.
Also, the company’s total liabilities declined by 8.13% to ₦278.56 billion from ₦303.23 billion half year due to a significant decline in short-term loans and borrowings during the period.
The brewer’s financials show that short-term loans and borrowings fell by 73.52% to ₦29.86 billion in the period under review, from ₦112.74 billion a year ago as management continues to reduce leverage position.
Consequently, analysts review shows that the net assets of the company improved by to ₦166.91 billion, from ₦160.89 billion recorded in the first half of 2020.
This resulted in a higher Net Assets per Shares of ₦20.87 as against ₦20.12 debut in the first half of 2020 amidst the pandemic.
“Although the balance sheet remains very strong, the higher operating expenses, if not properly managed, may adversely affect the operating performance of the company in the second half of 2021”,
Hence, PAC Capital analysts reveal an expectation for a slight increase in dividend payment in the full year of 2021.
NB Plc: Valuation Spots Weak Upside as Cost Pressure Dents Earnings
