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Nigerian Breweries Plc Q3'20: Expected Volume Recovery Brings Earnings in Line
Nigerian Breweries Plc | Q3-20 | First Glance: Better Than Expected Volume Recovery Brings Earnings in Line with Estimates

By Cordros Capital

NB published its Q3-20 results yesterday (29 October). The company reported a positive Q3 EPS (NGN0.17 vs Loss Per Share of NGN0.13 in Q3-19) for the first time since Q3-17, driven by a surge in revenue, and lower operating expenses. Annualised, the achieved revenue is 6.5% behind consensus estimates for 2020E. However, the annualised 9M-20 EPS is broadly in line with consensus 2020E estimates (variance: -1.4%). On the 9M EPS of NGN0.87 (-43.5% vs. 9M-19), the board has proposed an interim dividend of NGN0.25/s (-50.0% y/y), implying a dividend yield of 0.5% on the last closing price of NGN52.00/s.
Net revenue grew by 25.6% y/y in Q3-20, driven mainly by a strong recovery in volumes following the gradual reopening of on-trade channels in Nigeria. Also, in addition to slightly higher product prices (c. 4% y/y), we note that NB did not face any topline pressure from excise duty increases for the first time in three years (excise duty is flat at N0.35/cl in 2020). In its Q3-20 trading update, Heineken NV (NB’s parent company) stated that in Nigeria, (1) beer volume grew in the high-teens (c.16%-20%), ahead of the market, with the non-alcoholic portfolio growing in the mid-twenties and the premium portfolio growing by more than half. Sequentially, net revenue grew 19.8% q/q on higher volume, despite Q3 being a seasonally weak quarter.
Gross margin (+2bps) was flat at 37.5% in Q3-20, dampened by strong cost pressures from surging inflation and currency weakness. In our view, gross margin has remained resilient and the performance is indicative of the continued growth in the premium segment which has been positive.

Operating profit surged 948.9% y/y to NGN7.44 billion due to (1) the growth in gross profit (+25.6% y/y), (2) the decline in operating expenses (-2.3% y/y), and (3) the low base in Q3-19 (NGN709.65 million). NB’s parent company has been implementing cost mitigation actions across all its local OpCos, which involves “reducing all discretionary expenses while providing sufficient support behind its brands and route to markets.” Consequently, marketing and distribution expenses declined by 7.8% y/y, bringing the total operating expense to revenue ratio down to 28.7% (Q3-19: 36.9%). EBITDA rose by 94.4% y/y equating to an EBITDA margin of 21.4% (13.8% in Q3-19). This implies an expansion of 756 bps in EBITDA margin.
Elsewhere, net finance cost (+66.1% y/y) hit a record high of NGN4.81 billion, as finance costs surged by 67.5% y/y. On finance costs, we note that the balance of bank overdrafts and commercial papers (NGN85,818 billion) in Q3-20  is significantly higher compared to Q3-19 (NGN29.61 billion) and Q4-19 (nil), following NBs NGN90.00 billion commercial paper issuances in February (NGN52.76 billion) and April (NGN37.36 billion) of this year. Though the detailed split of the company’s finance costs was not disclosed, we suspect that the company also recorded some FX losses due to exposure from its foreign currency denominated payables.
Despite the preceding, the operating profit strength drove EPS higher to NGN0.17 in Q3-20 (Q3-19: -NGN0.13)

Comment: The growth is quite impressive and shows that the company is best-positioned amongst its peers to (1) recover strongly from the pandemic-hit year, and (2) brave the current macroeconomic headwinds. With the share price down 11.6% YTD, positive earnings and a dividend offered, we expect a positive reaction. Our estimates are under review.

[Image: 04f8418f-17d4-46e1-a63b-6d0a28667363.jpg]
Hi Kevin,

the "assumed" grain absorption here was to construct a simple example to illustrate who beer smith gives me a starting volume different than what i expected. In real life, as you said, i measured actual volumes and grain absorption, boil off etc not many other losses I do BIAB. My point was only to illustrate that if you lose 0.5 gallons and 1 gallon to boil off and want 5.5 gallon into the fermenter then the correct starting volume is 7 gallons. Beersmith says 7.25. It's now understood why, even though it seems to me a funny idea to include heat expansion in initial volume.

In my simple example, an extra 0.25 gallons at the start would yield an OG 4 points below target. Not the end of the world sure, but i enjoy fine tuning and hitting targets. While I understand why many people glance over this as unimportant, to me it's part of the fun.

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