International Breweries: Strong Q4, cautiously optimistic on outlook –FBNQuest

Modest upward revision to PT

Following International Breweries’ (IB) stronger-than-expected Q4 2016 (end-Mar) results, we have increased our earnings forecasts by 15% on average over the 2017-18E period.

However, we have increased our price target by a slimmer margin of 2.7% to N21.60. We have limited how much of the positives we reflect in our DCF because management has effectively stopped providing commentary on drivers behind the company’s results and outlook.

From current levels, the shares are trading on a 2017E P/E multiple of 24.8x (compared with the brewery sector average of around 30x) for average EPS growth of 6% y/y over the 2018-19E period. Year-to-date, the shares have gained 25.1% and have outperformed the broad index by 31.4%. As such, we have retained our Neutral rating on the stock.

Near term outlook

Based on the results so far, it would appear that IB is benefitting from the shift in consumer spend towards the mid/value range where it has a strong presence. Our channel checks indicated that prices were flat to modestly up during the Q4 period; as such we believe the strong y/y sales growth of 28% y/y was more likely boosted by volumes.

With inflation now in the teens and likely to remain there for some time, growth is likely to moderate for the sector as a whole. Our 2017E IB sales growth forecast of 8% y/y compares with 13% y/y for 2016. That said, we continue to expect IB to come off better than its larger peers because of its product mix.

Good Q4 2016 numbers

IB’s Q4 2016 sales of N6.8bn were up 28% y/y. PBT and PAT grew much faster, by 120% y/y and 90% y/y to N1.3bn and N943m respectively. The results were significantly ahead of our estimates. Although operating expenses grew by 69% y/y, this was not enough to offset the strong sales growth and a gross margin expansion of 625bps y/y to 35.5%.

These positives led to the significant improvement in PBT y/y. PAT growth was held back by a higher tax rate of 25% (vs 13% in Q4 2015). Sequentially, while sales grew by 8% q/q, PBT and PAT both declined by -11% q/q and -6% q/q respectively due to a combination of a gross margin contraction of -1,519bps q/q and an 89% q/q rise in net interest expense.

We suspect that cogs and opex were affected by accounting effects (changes to Q1-Q3 estimates). On a full year basis, sales, PBT and PAT all grew, by 13% y/y, 30% y/y and 36% y/y respectively.

Iheanyi Nwachukwu