Friday , July 27, 2012 / ARM Research Download Full Report Here NB top line in line with expectation
NB Q2 2012 turnover grew 24% YoY to 136 billion largely in line with our expectations; a 3%QOQ growth despite concerns of a decrease in consumer disposable income on the back of increased fuel costs and lingering crisis in the Northern part of the country. Sales were reportedly bolstered by a re-launch of Life Continental Lager in May backed by an aggressive sales drive. The sharp uptick in receivables to N 41billion from N 11billion FY 2011 indicate significantly increased credit sales to distributors. This possibly reflects the impact of new capacity and attendant sales initiatives, but at ~30% of sales is significantly ahead of the 4% trailing 5year average; flagging potential pressure points for working capital related costs and future earnings which we’ll monitor into the year. Figure 1: Quarterly Turnover (N’Billions)
Earnings soften despite turnover growth
Cost of sales rose 30% YoY reflecting increased input cost and losses incurred on forex transactions on the back of a weaker naira. Despite NB policy of 60% minimum local content, rising domestic inflation affected prices of locally sourced sorghum, while prices of malted barley required in the production of its Heineken lager rose through Q1 2012. A sharp decline in April coinciding with the spring barley harvest was short lived; prices began picking up in May and exacerbated in NB’s case by a ~6% YoY decline in the NGN/USD as at the end of June.
There was a 4.4% QoQ decline in distribution and admin expenses, despite a 20% YoY jump, probably reflecting YoY increase in global energy prices over the period and currency effects. We do not believe domestic fuel price increases had a significant impact on NB’s costs--this being largely restricted to premium motor spirit--though a hike in electricity tariffs at the beginning of the base in Q3 2011 may also have hurt.
Interest expense continues to weigh heavily on earnings reaching N2.4billion compared to N12million in 2011, reflecting charges on N 47billion in loans incurred in the FY 2011 acquisition of Sona Systems and Life Breweries. Notably, a QoQ increase in both long and short term borrowing by N8b and N1.8b respectively probably reflects NB increased working capital requirements and possibly amplified by sharply higher trade receivables.
Reported earnings of N 19billion fell 10.5% shy of our N 21billion forecast, with a YoY increase of 1.25% and 2.23% in PBT and PAT respectively.
The 7.6% YoY decline in Q2 2012 PAT figures largely attributable to the expense items mentioned above.
Both PBT and PAT margins fell 470bps and 30bps YoY respectively reflective of the decline in earnings.
Slower growth phase to persist as costs weigh
Adjustments to our forecast driver’s result in a marginally lower FY 2012 sales forecast of N 279billion compared N 288billion as at our last updates. Assumptions around the impact of recent expansions are largely unchanged but we now believe benefits may not fully materialize by YE 2012 given the timing of recent plant upgrades and the potential impact of instability in Northern Nigeria on regional sales.
We expect continued pressures on profit margins on the back of continued increase in input prices both locally and domestically. Domestic inflation is expected to rise in the near term on the back of an upward review of import duties on wheat and rice in July 2012. The global benchmark price of wheat has rallied 43 percent since mid-June on the Chicago Board of Trade as the worst U.S. drought in 56 years sapped grain crops and torrential rains in Europe threaten to erode the quality of malted barley fueling expectations of an uptake in prices through Q3 and Q4.
Interest expense should continue to weigh heavily on margins as NB service loans taken last year during expansion. Loans and borrowings rose to N 51b in Q2 2012 up from N 43b in Q1, suggesting that increases in interest expense will likely persist through FY2012.
In our last update, we noted a 22% rise in fixed assets to N121billion in Q1 2012 up from N 98billion in December 2011 and are now able to ascribe this to NB’s upgrade of its brewery in Onitsha which was completed earlier in 2012. Q2 fixed assets figures rose 1.8% from Q1. We do not envisage any drastic increases in fixed assets as we strongly believe the current levels capture the consolidation of fixed assets as well as the effects of the recent upgrade carried out on its Onitsha brewery early this year. However, we forecast a ~35%YoY rise in depreciation charges, and expect more modest YoY increase in distribution and admin expenses (18%) on the back of an amelioration of earlier highlighted cost pressures, particularly energy. Revising Valuations
The factors driving the revision of FY2012 to N 279billion revenue estimates—which is a 21% increase over 2011(5 year average.: 22%)—reflects in marginally lower 2013-15 forecasts as well, offset to some extent by an extension in timelines for full realization of expansion benefits. Our forecasts also incorporate marginal decline in margins largely reflecting and upward revision to the trajectory of depreciation and interest charges. At N41billion, revised FY2012 PAT estimate is an 8.1% increase from FY2011 but 6.8% behind our previous forecast. Our revised assumptions also incorporate marginal downgrades in subsequent years’ earnings. . A 50bps decline in cost of equity reflecting the launch of new plants within the year was offset somewhat by a increased cost of debt, but nevertheless resulted in a slight upward adjustment to our in TP to N 111.25, from the previous N106.5; a 4.9% discount to current price. NB trades at a 2012 P/E of 18.29x and a P/B of 8.36x. We retain our NEUTRAL rating on the stock. ARM ratings and recommendations
ARM now employs a two-tier rating system which is based on systemic importance of the security under review and the deviation of our target price for the stock from current market price. We characterize systemic importance as a function of a stock’s ranking among the group of top 20 stocks by NSE market capitalization over a trailing 6 month period (minimum) to the review date. We adopt a 5 point rating system for this category of stocks and a 3 point rating system for stocks outside this group. The choice of top 20 stocks arises from the consideration that this group of stocks constitutes >75% of overall market capitalization and stocks outside this group are generally less liquid and individually account for <<1% of market capitalization. For stocks in both categories, the basis for ratings subject to target price deviation is outlined below:
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