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IntBrew 9M'20 - Business Restructuring Efforts Evident in Q3’2020
International Breweries Plc 9M'20 - Business Restructuring Efforts Evident in Q3’2020 Earnings Performance


International Breweries Plc (‘IntBrew’ or ‘the Group’), in its recently released Q3’2020 earnings result, reported a 23% year-on-year (YoY) revenue growth from N28.63bn in Q3’2019 to N35.15bn in Q3’2020. Although the Group loss-making position sustained in Q3’2020, the numbers were very much improved. Operating loss improved by 35% YoY from a loss of N7.44bn in Q3’2019 to a loss of N4.86bn in Q3’2020. Loss before tax stood at N5.74bn, relative to a loss before tax of N13.55bn in Q3’2019. In a similar trend, loss after tax improved by 84% YoY from a loss of N9.60bn in Q3’2019 to N1.52bn in Q3’2020.

Continued Business Expansion Drive Support Topline Growth
The Group’s focus on growing volumes and market share sustained in Q3’2020, reflected in the 23% YoY revenue growth in Q3’2020. We attribute the revenue growth to factors analysed below:

i. Lockdown Easing: The gradual reopening of bars, hotels, and other major sale points contributed to volume growth during the period. The lockdown easing also meant an improvement in supply chain and distribution. We note that revenue declined by 25% YoY in Q2’2020 when the pandemic was at its peak in Nigeria. The revenue decline in Q2’2020 was the heaviest revenue decline since the consolidation of the Group in 2017.

ii. Launch of new products: The Group introduced ‘Trophy Stout’ in April 2020. The brand stands to compete with Guinness Stout manufactured by Guinness Nigeria Plc, and Legend Stout by Nigerian Breweries Plc. Although we do not have actual details of volume growth and total contribution to the Group’s overall volumes, we believe that the reception of the new product was high among consumers. Based on our retail survey, we posit that the recently launched product gained a significant traction
during the period.

iii. Expansion into new markets: We believe that the continued drive towards expanding market share and consumer base had an impact on revenue growth during the period.

FX Losses Lower Topline Gains
Gross profit grew by 47% YoY from N4.06bn in Q3’2019 to N5.96bn in Q3’2020, driven by a 300 basis points decline in cost margin from 86% in Q3’2019 to 83% in Q3’2020. However, an ‘other expense’ of N758.56mn in Q3’2020 (Q3’2019: ‘other income’ of N412.43mn), resulted in a lower 16% growth in operating income from N4.47bn in Q3’2019 to N5.19bn in Q3’2020. The other expense of N758.56mn was majorly driven by FX losses incurred during the period, resulting from an exchange rate devaluation.

Cost Efficiency Underpins Restructuring Efforts
Operating expenses declined by 16% YoY from N11.92bn in Q3’2019 to N10.06bn in Q3’2020. The decline in operating expenses resulted from a 42% YoY dip in marketing and promotion expense (from N5.41bn to N3.15bn). We posit that the decline was due to lower marketing activities induced by the coronavirus pandemic. We think that many of the Group’s planned events could not take place due to social distancing and other Covid-19 preventive measures.

Administrative expenses, on the other hand, grew by 6% YoY from N6.51bn to N6.91bn. The relativelymanaged administrative expense (i.e. 300 basis points decline in administrative expense margin from 23% in Q3’2019 to 20% in Q3’2020) is attributed to restructuring exercise, enhanced and efficient business operations during the period.

As a result, the loss incurred in Q3’2020 was 35% YoY lower than Q3’2019 figures. The overall lossmaking position emanated from the inability of operating income to cover operating costs, despite improvements recorded both on income and expense lines.

Lower Finance Costs on the Back of Deleveraging Efforts
Owing to the N165bn equity capital raised earlier during the year to deleverage the balance sheet, the Group’s total borrowings declined by 55% YoY from N243.83bn as of 9M’2019 to N108.67bn in 9M’2020. As a result, the Group’s gearing ratio lowered from 13.03x as of 9M’2019 to 0.72x in 9M’2020 (Nigerian Breweries Plc: 0.82x; Guinness Nigeria Plc: 0.20x). Consequent to the lower debt levels, finance cost declined by 85% YoY from N6.11bn in Q3’2019 to N894.84mn in Q3’2020.

The combination of lower operating expenses and finance costs resulted in a 58% improvement in loss before tax. Loss after tax also improved by 84% YoY.

We expect to see continued improvement in earnings, on the back of sustained cost optimisation and expense management. Revenue growth is likely to be materially higher, in our view, owing to aggressive route-to-market and increased market share. While we expect to see aggressive drive towards increasing market share, we also note the impact of heightened competition in the industry. Hence, we believe that a turnaround in the business will be gradual towards a longer-term horizon.

We valued the stock using a blend of Discounted Cash Flow Model, Residual Income Model, and Enterprise Value valuation methodologies. Overall, we arrived at a fair value of N6.58. The total return on the stock, based on the current market price, is -8%. The percentage return falls within our HOLD threshold. Hence,

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