NB Plc: Equity Analysts Cut Profit Estimate for 2020 By 57%
Equity analysts have cut Nigerian Breweries Plc profit for 2020 by 57% due to disappointing first half performance scorecard and low expectation on sales recovery.
The outbreak of coronavirus pandemic has not been favourable for Nigerian Breweries Plc as revenue dropped significantly amidst rising costs.
Due to weak expectations, analysts have remained largely negative about prospect in the segment down the year as Meristem Securities estimate 57% year on year decline in profitability for 2020.
Also, WSTC Securities downgraded the stock to HOLD, just like Meristem in what looks like consensus about the brewer’s performance outlook.
“We expect recovery to be slowed even if the economy re-opens”, analysts at WSTC Securities Limited said.
Traded at ₦32 on Monday, Investors currently valued NB Plc at ₦255.9 billion on share outstanding of 7,996,902,051.
The stock 52-week trading data shows NB Plc had peaked at ₦59.75 while the lowest within the period had been ₦22.
The brewer’s first half 2020 results reflected strong demand pressure as customers scale down on demand couple with increase in prices.
For financial year 2020, equity analysts at Meristem Securities estimated 57% year on year plunge in profit after tax.
The review of the brewer’s unaudited results showed that for the first time in the history of NB Plc, its net margin hits the bottom of the pyramid.
Equity analysts representing various investors group said rising from this position would take aggressive marketing and cutting edge strategy.
Being an elastic consumption, lower purchasing power emanated from low household income, inflation that has been worse by local currency devaluation aggravated the pressure.
Though, Nigerian Breweries is still standing, there is a bleak future for demand for its beers and other ready to drink due to lower purchasing power.
Generally, Nigerians are scaling down demand across various consumption lists, though for some, beers could be elastic demand!
Meristem Securities explained that following a slow start to the year where first quarter revenue declined by 0.09%, NB Plc. reported an even sharper drop in its Q2:2020.
Analysts review stated that the brewer’s revenue somersaulted 21.06% in Q2:2020 standalone relative to Q2:2019.
“The recent downward movement represents the brewer’s worst second quarter performance since Q2:2011”, Meristem stated.
“While we alluded to a likely drop off in sales in our Q1:2020 earnings update, we did not envisage this magnitude of decline given that NB typically records the best performance in Q2”, analysts explained.
At ₦151.81 billion, the brewer’s total revenue for H1:2020 was 10.80% lower than the corresponding period of 2019.
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The restriction of various point of consumption and large social gatherings continue to weigh on the demand for alcoholic beverages.
Meristem agreed that this is further worsened by the general tilt towards essential items in the face of shrinking disposable income of consumers.
More so, market feelers suggest that consumers were unreceptive to the price increases imposed by the brewer on certain brands last year.
“Based on the aforementioned, we remain downbeat about performance for the rest of the year.
“In addition, we envisage a poorer third quarter result especially because Q3 is typically the worst quarter for the brewers, as sales are generally weak during the period”, Meristem stated.
Thus, analysts said they have revised initial revenue projection of ₦314.47 billion downward by 13.33%.
“We now expect 2020 revenue to drop by 15.63% year on year to ₦272.54 billion”, analysts at Meristem Securities stated.
- Cost Savings Fail to Support Bottom-Line:
Although, production costs fell in line with revenue, cost to sales inched up to 61.04% in H1:2020 as against 57.90% in H1:2019.
This plunged gross margin to 38.96% from 42.10% in the corresponding period as more than 61% of sales were direct cost.
Operating expenses bucked the trend in Q1:2020, as it moderated to ₦20.29 billion in Q2:2020 from ₦26.46 billion in Q2:2019.
This set operating expenses lower by 6.68% to ₦44.43 billion in H1:2020 from ₦47.61 billion in H1:2019.
NB Plc achieved this on the back of a 10.03% drop in marketing and distribution expenses.
However, the moderation in operating expenses was insufficient to support the already weak margins,
…hence, operating profit fell by 38.49%, with a deterioration in operating margin to 9.91% from 14.37% in H1:2019.
Meristem said in line with its expectation for interest expense, net finance costs went up by 32.59% to ₦6.70 billion as total borrowings which comprised bank overdrafts, commercial papers and other bank loans settled at ₦139.45 billion from ₦55.72 billion in 2019.
As a result of the increase in finance costs and a higher effective tax rate of 33.62% put further strain on earnings.
In the comparable period, the brewer’s effective tax rate had pitched at 31.42%.
Consequently, profit for the year fell significantly by 58.03% to ₦5.59 billion as against ₦13.32 billion in H1:2019.
As expected, this dragged net margin to 3.68% which happened to be the lowest in the brewer’s history, from 7.83% in H1:2019.
Down the line, the decline in net margin led to a slump in return on equity (ROE) to 6.97%, from 14.86% in H1:2019.
“Factoring our expectation of a moderation in topline amid rising cost pressures, particularly finance costs, we have revised our forecast for profit after tax downwards to ₦6.99 billion.
“That translates to a 56.59% year on year decline from ₦16.11 billion in 2019”, Meristem Securities noted.
From its unaudited result, analysts noted that NB increased capital expenditure (CAPEX) spending in H1:2020.
Cash generated from operations pegged at ₦9.49 billion during the period, while total cash balance improved by 797.70% to ₦57.10 billion due to inflows from loans and borrowings.
In addition, Meristem Securities analyst explained that there was ₦14.66 billion increase in capital expenditure as NB invested in plant and equipment during the period to support its growth projection.
“Premised on our adjustment of expected EPS to ₦0.87, from ₦1.60 and new target price earnings of 35.00x, we arrived at a target price of ₦30.45.
“This represents a downside potential of 4.84% when compared to the closing price as at 6th of August, 2020. Hence, we place a HOLD recommendation on the ticker”, analysts stated.
NB Plc: Equity Analysts Cut Profit Estimate for 2020 By 57%
