Nigerian Breweries

NB Plc: Vetiva’s analyst slashed share price target on performance concern

Vetiva’s analyst, Chinma Ukadike, downgrades Nigerian Breweries stock, having recognised the brewer’s stable performance in a rough terrain.

At ₦37.50, NB Plc market capitalisation settled at ₦299.883 billion on 7,996,902,051 shares outstanding.

In its unaudited Q1’20 results released recently, Nigerian Breweries reported a revenue figure of ₦83.2 billion, flat compared to Q1’19.

Given the pressure from the pandemic at the tail end of the quarter, we see this revenue as decent and in line with estimated sector growth.

The analyst noted that the company recently increased pricing across its malt and beer segments.

Vetiva believes that a significant boost may have come from looser credit policies evinced by the 33% quarter on quarter increase in receivables.

Revenue however declined 4.72% quarter on quarter, coming off the seasonal Q4 high and reflecting the challenging end to Q1’20 owing to the start of social distancing in key cities across Nigeria.

“Looking forward, for as long as the pandemic lasts, we expect beer volumes to suffer considering that sizable demand from entertainment centers

“…such as bars, lounges, clubs and hotels – which constitutes a substantial part of beer demand – would be significantly reduced”, Vetiva stated.

Vetiva’s analyst explained that research from the World Health Organization attributes reduced immune levels to alcohol consumption should also prove to be a negative for beer consumption.

“Although we expect the company’s innovative through discounts and strategic partnerships to drive sales in this period.

“However, we expect further depressed consumption levels and expect revenue to decline 29% to ₦227 billion for the full year”, Vetiva stated.

Our view is based on the expected shrinkage to income as the economy suffers twin shocks from reduced activity and the slump in oil prices, the equity note reads.

Ukadike stated that amidst impressive cost containment measures, gross margin also stayed relatively constant at 41.9%, rising 170 basis points quarter on quarter.

He said it is interesting to note that despite prevailing challenges to sales and distributions, marketing and distribution expenses grew 13.54% year on year ₦18.8 billion.

The surge was buoyed by ₦2.1 billion increase in advertising and sales expenses, the analyst added.

Vetiva equity research note revealed that increased in advertising and sales expenses brought EBIT down 22.3% to ₦10.9 billion.

Further down the EBIT line, net finance cost grew 1.52% year on year to ₦2.6 billion due to issue of four commercial papers series worth ₦93 billion to support short term funding needs.

Vetiva’s analysts believe that this was a strategy to restructure its debt, taking advantage of interest rate realities; this supported a 4x growth in cash balance.

All in, PBT and PAT came in 28% and 31% lower at ₦8.2 billion and ₦5.5 billion respectively.

PAT expected to drop to ₦5 billion, TP estimated at ₦39.25

Ukadike in adjusting full year cost estimates in line with current and expected realities sees significant contraction in sales volume.

This, according to the analyst will drive a 113 basis point decline in gross margin to 39.5%. Thus, translated to a full year gross profit forecast of ₦89.7 billion.

The analyst estimated a 50.2% decrease in profit to ₦17 billion; which he said it was driven by a 300 basis points reduction in operating margin.

Also, Vetiva’s analyst adjusted finance cost estimates to reflect series 7 and 8 commercial papers and project a PBT of ₦8.6 billion and PAT of ₦5.8 billion.

Representing a 20.6% and 17.1% year on year decline respectively.

As a result of the review, Vetiva slashed target price to ₦39.25 per share with a hold recommendation.

NB Plc: Vetiva’s analyst slashed share price target on performance concern


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