International Breweries Records Worst Q2 Performance after Merger, Dump Analysts say
· Stock dangling between analysts’ Buy, Sell Recommendation
· We posit that the stock is oversold, could present upside opportunities – WSTC
· Bearish outlook for rest of 2020 is colored by existing industry headwinds – Meristem
Pressure on demand for International Breweries (IntBrew) Plc.’s products, a key challenger in the beer market, is affecting the company’s performance scorecard.
In the second quarter, IntBrew recorded material decline in sales due to coronavirus outbreak which resulted to economic lockdown.
Obvious pressure cast doubt on future outlook in the segment, and this forced analysts to downgrade revenue estimates by 13.24%.
The brewer reported a 24.66% decline in revenue to ₦25.27 billion in Q2: 2020, coming from strong position when sales was ₦33.53 billion in Q2:2019.
Analysts at Meristem Securities Limited said as expected, sales slowed during the period due to softer demand for alcoholic beverages in the absence of social gatherings, plus a general shift towards non–discretionary spending.
Analysts explained that the underwhelming outing in the second quarter weighed on the already fragile first quarter performance where revenue inched up by a meagre 0.72% relative to Q1:2019.
As a result, topline settled at ₦60.61 billion for H1:2020 compare to ₦68.63 billion in H1:2019.
“We still see scope for further decline in sales despite the phased relaxation of lockdowns due to the ongoing social gathering restrictions, which might likely remain for the rest of the year.
“Considering the significant impact COVID-19 had on sales in the last quarter, we envisage volumes in the coming period to remain depressed amidst the ongoing intense competition in the industry.
“Risks remain tilted to the downside, thus, we revise our revenue projection downwards by 13.24% to ₦111.97 billion from ₦126.79 billion earlier projected“, Meristem Securities stated.
This implies a 15.40% decline from the brewer’s revenue performance in financial year 2019.
However, Meristem Securities noticed that a sharp cut in marketing spend sustained operating expenses downtrend
In Q2 standalone, Meristem said production costs fell by 21.20% in line with the drop in revenue to ₦21.90 billion, bringing total cost of sales for H1:2020 to ₦51.07 billion which was 5.32% less than H1:2019.
The drop off is traceable to 23.49% declines in raw material expenses and overhead costs, 53.21% decline in technical management fees and 48.86% drop in depreciation expenses.
Despite this moderation, analysts said cost to sales for H1:2020 edged up to 84.26% from 78.60% in the corresponding period.
Then, gross margin contracted to 15.74%, from 21.40% in H1:2019.
Explaining the results, Meristem stated that the brewer also slowed down by 50.34% of its marketing budget and another 4.37% drop in admin expenses was recorded during the quarter.
These drove operating expenses down by 11.25% year on year to ₦15.97 billion.
Meanwhile, gains from derivative and sundry income were not enough to bolster operating profit which worsened to ₦11.03 billion negative from loss position of ₦3.50 billion in H1:2019.
Analysts said the company’s interest bearing obligations settled lower at ₦107.59 billion after the brewer repaid a portion of its debt (₦164.53 billion) in Q1:2020.
Thus, finance costs for the period fell sharply to ₦948mn as against ₦7.03 billion in H1:2019 which underscore the lower leverage in the period.
Meristem Securities explained that this, coupled with a tax credit of ₦2.63 billion moderated the overall loss to ₦9.36 billion.
“For the rest of the year, we maintain our position of the firm remaining in a loss position this year due to the significant contraction in topline and lingering cost pressures“, analysts stated.
Liquidity Remains Constrained:
From analysts at Meristem perspective, liquidity remains a big constraints facing the brewers.
The investment firm noted that INTBREW generated ₦9.15 billion from operations in H1:2020, 73.16% lower than the ₦34.08 billion recorded in the previous year due to changes in working capital management.
The firm’s trade receivables declined to ₦21.41 billion in H1:2020, while the brewer held off on payment to suppliers, pushing account payables up to ₦79.81 billion and days of payables to 279days
This signpost pressure on its side industry’s data shows that peers were doing better – NB: 191days, GUINNESS: 141days.
Meristem stated that both current and quick ratio settled at 0.40x and 0.28x as against 0.40x and 0.29x as at 2019.
Again, this signaled no net improvement in liquidity conditions, while working capital remained pressured at negative position of ₦114.26 billion as at H1:2020.
Outlook and Recommendation
As we highlighted in our Q1:2020 update, our bearish outlook for the rest of the year is colored by existing industry headwinds.
These include intense competition, excise duties and muted consumer spending as well as the impact of COVID-19 on sales.
“Accordingly, we revise our estimates of 2020 earnings before interest, tax, depreciation and amortisation (EBITDA) margin to 5.00% (₦5.60 billion) and target enterprise value (EV) to EBITDA multiple at 27.50x.
“This yields a target price of ₦2.90, which represents downside potential of -12.12% compared to its price of ₦3.30 in the last trading day in July.
“Therefore, we place a SELL rating on the ticker“, Meristem stated.
Though, Meristem stays bearish, WSTC Securities limited is looking at potential upside at the firm recommend IntBrew to investors.
Read Also: WSTC upgrades GTBank to BUY rating on improved expected total return
In its equity analysts note, WSTC Securities Limited while sustaining the issues around IntBrew business risk rated the stock a Buy.
“We think that the Q2’20 numbers released by the Company will have a negative impact on its
share price performance“, WSTC stated.
Explaining the fundamental, WSTC stated that already, the profitability of the breweries industry has been on a decline in the last four years due to macroeconomic vulnerabilities.
A major challenge faced by players in the industry include a declining household income, analyst stated.
WSTC said in a dire situation, the lower household income has been on a shrinking trend due to high inflation.
Therefore, the disruption in economic activities and the inability of the Company to run at maximum capacity is a big blow to earnings potential.
Analysts at WSTC expressed believe that even with a possible economic reopening on the horizon, it could take a much slower rise in household income and consumption levels.
Although the Company reported a loss in Q2’20, WSTC stated that the released numbers were in tandem with its expectation.
However, WSTC stated that it has revised fair value of IntBrew upwards from N3.56 to N4.25.
The upward revision was as a result of a downward revision of our estimated weighted average cost of capital (WACC) used to discount our projected cash flows. WSTC explained.
The firm said the notable change in its WACC computation was the risk-free rate assumption which changed from 11% previously to the current market yield of 8%.
“We also note that the stock price declined by 37% between our previous earnings release and as of the writing of this report.
“Our pessimism on the stock still holds, as we do not see a significant growth driver in the near to medium term.
“Some of the underlying vulnerabilities of the stock include a higher-than-average cost margin – in which costs are significantly exposed to fluctuations in exchange rates”, analysts stated.
Analysts at WSTC said combination of a low industry growth combined with internal vulnerabilities drives dim outlook on the stock.
“However, we believe that at current market prices, the stock stands at a relative bargain to our fair value estimate.
“We posit that the stock is oversold and could present upside opportunities in the near to mid-term, particularly when the economy recovers”, WSTC stated.
International Breweries Records Worst Q2 Performance after Merger, Dump Analysts say
