By Dipo Olowookere
Investors have been advised to offload Nigerian Breweries shares in their holdings because things look gloomy for the brewery giant.
Recently, the company released its financial statements for the year ended December 31, 2018 and from the numbers, analysts at Cordros Research said they “expect net earnings to decline further in 2019E on intense competition from International Breweries and Guinness Nigeria, a further increase in excise duty, and still-weak consumer demand environment.”
In their report, they said Nigerian Breweries will suffer a 3.6 percent decline in net revenue, flattish gross margin and 15.2 percent EBITDA and 26.9 percent net profit declines.
It further said volume growth will remain weak in 2019 given cautious macro outlook, amidst a still pressured consumer wallet and a more intense competitive environment.
“Although a bright spot for volume exists in the premium segment leveraging Heineken, we expect the depression in the economy (the new mainstream) segment will continue for the next 2-3 years.
“On the whole, we revise our 2019E net revenue forecast lower by 1.2 percent to N312.84 billion (-3.6 percent y/y),” Cordros Research said.
Commenting on the gross margin estimate for 2019E, Cordros revised this 72 bps lower to 38.6 percent, and estimates over 2020-2021E to average 39 percent.
It pointed out that margin impairment is expected to continue until 2021FY, with Nigerian Breweries facing costs, excise, and selling price pressures.
It was predicted that excise duty should grow by N0.35/cl by H1-19, further impacting net revenues of the company.
“Although management has stated it is prepared to take price increases throughout the year, we think this will be greatly dependent on competition (NB hastily hiked, then reversed, prices on Star Radler, Life, Gulder, and Goldberg in H1-18 following the increase in excise, however, competitors retained prices),” the report said.
The report further stated that it is slashing the 2019E EBITDA forecast by 14.6 percent on the back of rise in the OPEX, which will reflect increased marketing expenditure in pursuit of the shift from a sell-in to more of a sell-out strategy to address dwindling volumes.
“We forecast only a marginal decline in NB’s net finance costs (vs. 28.2 percent decrease in 2018FY), with borrowings (N41.13 billion in 2018FY) expected to moderate in line with a decline receivables,” the report stated.
On the valuation, Cordros Research said the net impact of the changes to its model is a cut to 2019E EPS estimate to N1.78 (from N2.63 previously) and a target price of N57.98 (previously N68.96), with SELL rating.
On a year-to-date basis, shares of Nigerian Breweries have dropped 6 percent.
“On our estimates, NB currently trades on 2019E P/E and EV/EBITDA multiples of 45.1x and 11.0x respectively, relative to MEA peer averages of 22.24x and 11.7x respectively,” it said.
Adedapo Adesanya